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Learning in the Credit Card Market

Author

Listed:
  • Sumit Agarwal
  • John C. Driscoll
  • Xavier Gabaix
  • David Laibson

Abstract

Agents with more experience make better choices. We measure learning dynamics using a panel with four million monthly credit card statements. We study add-on fees, specifically cash advance, late payment, and overlimit fees. New credit card accounts generate fee payments of $15 per month. Through negative feedback -- i.e. paying a fee -- consumers learn to avoid triggering future fees. Paying a fee last month reduces the likelihood of paying a fee in the current month by about 40%. Controlling for account fixed effects, monthly fee payments fall by 75% during the first three years of account life. We find that learning is not monotonic. Knowledge effectively depreciates about 10% per month, implying that learning displays a strong recency effect.

Suggested Citation

  • Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," NBER Working Papers 13822, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13822
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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