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Dynamic Pricing of Credit Cards and the Effects of Regulation

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  • Suting Hong
  • Robert M. Hunt
  • Konstantinos Serfes

Abstract

We construct a two-period model of revolving credit with asymmetric information and adverse selection. In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex-ante consumer surplus. The model suggests novel approaches to identify empirically the effects of this law. We find the pattern of changes to interest rates and balance transfer activity before and after the CARD Act are consistent with the testable implications of the model.

Suggested Citation

  • Suting Hong & Robert M. Hunt & Konstantinos Serfes, 2021. "Dynamic Pricing of Credit Cards and the Effects of Regulation," Working Papers 21-38, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:93394
    DOI: 10.21799/frbp.wp.2021.38
    Note: Supersedes Working Paper 18-23 – Dynamic Pricing of Credit Cards and the Effects of Regulation
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    More about this item

    Keywords

    Financial contracts; Credit Card Accountability Responsibility and Disclosure Act; holdup; risk-based pricing; credit supply;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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