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Bank Competition and Consumer Search over Credit Card Interest Rates

Author

Listed:
  • Taehyung Kim
  • Lucia F. Dunn
  • Gene E. Mumy

Abstract

This article models bank competition facing consumers with different search incentives and finds that consumers with higher credit card balances have lower interest rates given their risk class due to their greater search effort. It also finds that a default history leads to higher interest rates. The equilibrium interest rate corresponding to risk type and motive (borrowing versus convenience/transactions) is derived theoretically, and the determinants of the interest rate are estimated using an original data set. Endogeneity of default is handled with a two-equation system.(JEL D14, D12, D11) Copyright 2005, Oxford University Press.

Suggested Citation

  • Taehyung Kim & Lucia F. Dunn & Gene E. Mumy, 2005. "Bank Competition and Consumer Search over Credit Card Interest Rates," Economic Inquiry, Western Economic Association International, vol. 43(2), pages 344-353, April.
    • Handle: RePEc:oup:ecinqu:v:43:y:2005:i:2:p:344-353
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    File URL: http://hdl.handle.net/10.1093/ei/cbi023
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    Citations

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    Cited by:

    1. Omar A. Abdelrahman, 2016. "Credit Card Rates and Consumer Switch: New Evidence," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(12), pages 95-105, December.
    2. Marques Benton & Krista Blair & Marianne Crowe & Scott Schuh, 2007. "The Boston Fed study of consumer behavior and payment choice: a survey of Federal Reserve System employees," Public Policy Discussion Paper 07-1, Federal Reserve Bank of Boston.
    3. Alan Schwartz, 2008. "How Much Irrationality Does the Market Permit?," The Journal of Legal Studies, University of Chicago Press, vol. 37(1), pages 131-159, January.
    4. Oh, Joon-Hee & Johnston, Wesley J., 2014. "Credit lender–borrower relationship in the credit card market – Implications for credit risk management strategy and relationship marketing," International Business Review, Elsevier, vol. 23(6), pages 1086-1095.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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