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Contract Terms, Employment Shocks, andDefault in Credit Cards

Author

Listed:
  • Castellanos, Sara G
  • Hernandez, Diego J
  • Mahajan, Aprajit
  • Prous, Eduardo A
  • Seira, Enrique

Abstract

Regulatory concerns over a tension between expanding financial access and limiting default have led to significant restrictions on contract terms in a number of countries, despite limited evidence on their effectiveness. We use a large nation-wide RCT to examine new borrower responses to changes in interest rates and minimum payments for a credit card that accounted for 15% of all first-time formal loans in Mexico. Default rates were 19% over the 26 month experiment and a 30 pp decrease in interest rates decreased default by 2.5 pp with no effects on the newest borrowers. Doubling minimum payments increased default by 0.8 pp during the experiment but reduced it by 1 pp afterwards, possibly by reducing debt. Matching the experimental sample to their formal employment histories we find that the effect of job separation—more common among new borrowers—on default is seven times larger than the contract term effects. We provide a simple framework for interpretation and rationalize the smaller contract term effects by their limited effects on cash flow, rather than by differences in per-peso impacts.
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Suggested Citation

  • Castellanos, Sara G & Hernandez, Diego J & Mahajan, Aprajit & Prous, Eduardo A & Seira, Enrique, 2024. "Contract Terms, Employment Shocks, andDefault in Credit Cards," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt3j9872fs, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt3j9872fs
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    Cited by:

    1. Joseph-Simon Görlach, 2023. "Borrowing Constraints and the Dynamics of Return and Repeat Migration," Journal of Labor Economics, University of Chicago Press, vol. 41(1), pages 205-243.

    More about this item

    Keywords

    Social and Behavioral Sciences;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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