Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence

46 Pages Posted: 9 Sep 2005 Last revised: 16 Feb 2011

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Michael B. Gordy

Board of Governors of the Federal Reserve

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Date Written: July 1, 2005

Abstract

To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new credit. In this paper, they revisit the question using the 1998 and 2001 SCF. Further, they use new information on card interest rates to test for pricing effects consistent with information-based switching costs. The authors find that informational barriers to competition persist, although their role may have declined.

Keywords: Credit cards, Consumer switching costs, Adverse selection

JEL Classification: D82, G2

Suggested Citation

Calem, Paul S. and Gordy, Michael B. and Mester, Loretta J., Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence (July 1, 2005). Journal of Banking and Finance, Vol. 30, No. 6, 2006; FRB Philadelphia Working Paper No. 05-16. Available at SSRN: https://ssrn.com/abstract=796108 or http://dx.doi.org/10.2139/ssrn.796108

Paul S. Calem (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Michael B. Gordy

Board of Governors of the Federal Reserve ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3705 (Phone)

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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