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Revolving credit lines and targeted search

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  • Raveendranathan, Gajendran

Abstract

I propose a model of revolving credit lines and targeted search to analyze what accounts for the profitability of the U.S. credit card industry. My analyses lead to two main findings. First, the search friction has minimal impact on the level of profitability of the credit card industry. Most of the profitability is a result of the lender choosing the terms of contract. Second, improved information about consumers accounts for the fall in profitability since the 1980s. Consistent with the data, lenders respond to more information by increasing credit card limits and lowering markups.

Suggested Citation

  • Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301329
    DOI: 10.1016/j.jedc.2020.103964
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    References listed on IDEAS

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    1. Jaromir B. Nosal & Lukasz A. Drozd, 2008. "Competing for Customers: A Search Model of the Market for Unsecured Credit," 2008 Meeting Papers 274, Society for Economic Dynamics.
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    4. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2605-2642.
    5. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
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    Cited by:

    1. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    2. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    3. Zachary Bethune & Guillaume Rocheteau & Tsz-Nga Wong & Cathy Zhang, 2022. "Lending Relationships and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1833-1872.
    4. Kyle Dempsey & Felicia Ionescu, 2021. "Lending Standards and Borrowing Premia in Unsecured Credit Markets," Finance and Economics Discussion Series 2021-039, Board of Governors of the Federal Reserve System (U.S.).
    5. Gajendran Raveendranathan & Georgios Stefanidis, 2022. "Designing “Win-Win” Rate Caps," Department of Economics Working Papers 2022-03, McMaster University.

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    More about this item

    Keywords

    Revolving credit lines; Targeted search; Consumer bankruptcy;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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