Time Inconsistency in the Credit Card Market

50 Pages Posted: 2 Sep 2004

See all articles by Haiyan Shui

Haiyan Shui

University of Maryland - Department of Economics

Lawrence M. Ausubel

University of Maryland - Department of Economics

Date Written: May 3, 2004

Abstract

This paper analyzes a unique dataset, which contains results of a large-scale experiment in the credit card market. Two puzzling phenomena are observed that suggest time inconsistency in consumer behavior: First, consumers prefer an introductory offer which has a lower interest rate with a shorter duration to that of a higher interest rate with a longer duration, even though they would benefit more ex post should they choose the latter. Second, consumers are reluctant to switch, and many of those consumers, who have switched before, fail to switch again later. A multi-period model with no uncertainty is studied to show that the standard exponential preferences cannot explain the observed behavior but the hyperbolic preferences can. Furthermore, we study a dynamic model where realistic random shocks are incorporated. Estimation results suggest that consumers have a severe self-control problem, with a present-bias factor beta equaling 0.8 and an average switching cost of $150. With the estimated parameters, the dynamic model can replicate quantitative features of the data.

Suggested Citation

Shui, Haiyan and Ausubel, Lawrence M., Time Inconsistency in the Credit Card Market (May 3, 2004). 14th Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=586622 or http://dx.doi.org/10.2139/ssrn.586622

Haiyan Shui

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Lawrence M. Ausubel (Contact Author)

University of Maryland - Department of Economics ( email )

Tydings Hall
College Park, MD 20742
United States
301-405-3495 (Phone)
301-405-3542 (Fax)

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