market frictions a unified model of search costs and switching costs it is well known that search costs and switching costs can create market power by constraining the ability of consumers to change suppliers while previous research has examined each cost in isolation this paper demonstrates the benefits of examining the two types of friction in unison the paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour competition and welfare in addition the paper also illustrates a simple empirical methodology for estimating separate measures of both costs while demonstrating a potential bias that can arise if only one cost is considered

overconfident consumers in the marketplace when consumers sign contracts expectations about future usage of the product or service matter for instance the value provided by car insurance depends on how likely a consumer believes she is to file a claim the value provided by a gym membership depends on how often a consumer anticipates going to the gym and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using the standard modeling paradigm makes the expedient assumption that consumers have rational expectations imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways this has important consequences for contract design firm profits consumer welfare and public policy the term overconfidence is used broadly in the psychology literature referring to both overoptimism and overprecision overoptimistic individuals overestimate their own abilities or prospects either in absolute terms or in comparison to others in contrast overprecise individuals place overly narrow confidence intervals around forecasts thereby underestimating uncertainty these biases can lead consumers to misforecast their future product usage or to overestimate their abilities to navigate contract terms in consequence consumer overconfidence causes consumers

payment card rewards programs and consumer payment choice abstract by using a unique data set that contains detailed information about consumer payment choice and consumers attitudes toward each payment method we estimate the effects of payment card rewards on consumer choice of payment methods our approach allows us to control for consumer heterogeneity we find the effects of rewards to be statistically significant across five retail types our policy experiments suggest that for the sub population who hold both credit and debit cards removing rewards would increase their share of paper based payment methods i e cash and checks measured in terms of in store transactions by no more than 4 percentage points

value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards abstract we present an algorithm for approximating the solution to discrete time stochastic dynamic programs with inequality constraints the algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space and polynomial approximation to improve computational efficiency it is particularly useful in financial applications involving liquidity and credit constraints and more than one asset the algorithm provides information about the derivatives of the value function and therefore risk aversion along with asset demands

borrowing high versus borrowing higher price dispersion and shopping behavior in the u s credit card market we document substantial cross individual dispersion in u s credit card borrowing costs even after controlling for borrower risk and card characteristics that remaining dispersion arises because cross lender pricing heterogeneity generates dispersion in annual percentage rate apr offers to borrowers and borrowers vary in shopping intensity our empirics match administrative data to self reported card shopping intensity and use instruments suggested by fair lending law to account for the endogeneity between aprs and search the results show that shoppers versus nonshoppers pay aprs as different as those paid by borrowers in the best versus worst credit score deciles we discuss implications for policy and practice

risk based pricing of interest rates for consumer loans abstract by focusing on observable default risk s role in loan terms and the subsequent consequences for household behavior this paper shows that lenders increasingly used risk based pricing of interest rates in consumer loan markets during the mid 1990s it tests three resulting predictions first the premium paid per unit of risk should have increased over this period second debt levels should have reacted accordingly third fewer high risk households should have been denied credit further contributing to the interest rate spread between the highest and lowest risk borrowers for people obtaining loans the premium paid per unit of risk did indeed become significantly larger after the mid 1990s for example for a 0 01 increase in the probability of bankruptcy the corresponding interest rate increase tripled for first mortgages doubled for automobile loans and rose nearly six fold for second mortgages additionally changes in borrowing levels and debt access reflected these new pricing practices particularly for secured debt borrowing increased most for the low risk households who saw their relative borrowing costs fall furthermore while very high risk households gained expanded access to credit the increases in their risk premiums implied that their borrowing as a whole either rose less or sometimes fell

permanent income hypothesis in emerging markets some brazilian evidence abstract this paper uses a dataset from one of the largest credit card issuers in brazil to investigate the extent of credit constraints for one of the world s largest emerging market economies in order to deal with the endogeneity problem from an observational dataset an identification strategy based on the issuer actual policies was used to better identify the long run effects of a credit card limit increase on debt the results point to a long run effect of credit limit on credit card debts of 0 1144 a similar size to the ones found in gross and souleles 2001 this value indicates the permanent income hypothesis is rejected for this sample and some evidence supporting a variation of buffer stock behavior is found furthermore results indicate the degree of heterogeneity in effects is much higher than similar results for developed countries lending credence to the conclusion credit constraints are much stronger for lower income groups this conclusion is in line to previous studies in brazil such as de lucinda and vieira 2014

the real costs of credit access evidence from the payday lending market using geographic differences in the availability of payday loans i estimate the real effects of credit access among low income households payday loans are small high interest rate loans that constitute the marginal source of credit for many high risk borrowers i find no evidence that payday loans alleviate economic hardship to the contrary loan access leads to increased difficulty paying mortgage rent and utilities bills the empirical design isolates variation in loan access that is uninfluenced by lenders location decisions and state regulatory decisions two factors that might otherwise correlate with economic hardship measures further analysis of differences in loan availability over time and across income groups rules out a number of alternative explanations for the estimated effects counter to the view that improving credit access facilitates important expenditures the results suggest that for some low income households the debt service burden imposed by borrowing inhibits their ability to pay important bills copyright 2011 oxford university press

how effective are rewards programs in promoting payment card usage empirical evidence card issuers have mainly relied on rewards programs as their main strategy to increase usage however there is scarce evidence on the effectiveness of these programs this paper is addressing two topics which could have important managerial and public policy implications i it estimates the impact of rewards on the use of cards and ii it quantifies their economic effects in terms of the cash substitution we find that rewards may significantly modify choice for card payments their economic impact also varies significantly across types of rewards and merchant activities additionally rewards seem to be more effective for debit cards

regulate one service tame the entire market credit cards in turkey abstract in credit card markets banks provide both payment and credit services two regulations were recently enacted in the turkish credit card market one on payment services in 2005 and the other on credit services in 2006 by employing the well known panzar and rosse 1982 panzar and rosse 1987 method and a unique quarterly data set for 21 turkish banks between 2002 and 2008 we investigate the extent of banks market power in the turkish credit card market before and after the regulations unlike most of the existing literature which considers competition and regulation for either credit or payment services and ignores the externalities between them we consider the entire market by taking both services into account fixed effects estimations reveal that banks enjoyed collusive oligopoly power before the regulations although the first regulation did not have much impact the second led to rises in both banks total revenues and competition in the entire market

when does economic growth reduce poverty and strengthen the middle class a state level sector specific analysis of peru using novel state level data of peru from 1997 to 2010 we investigate how growth in different sectors affects poverty rates and the middle class our results indicate that only the manufacturing sector seems to robustly decrease poverty growth in the service sector emerges as a meaningful predictor of a rising middle class allowing for regional differences we find substantial variation across the 25 peruvian states with large shifts in magnitudes signs and statistical importance beyond the immediate implications for peru these findings highlight the importance of analyzing the link between economic performance and poverty rates on a subnational level policy implications are likely to differ substantially depending on the source of economic growth and regional particularities

license to cheat voluntary regulation and ethical behavior although monitoring and regulation can be used to combat socially costly unethical conduct their intended targets can often avoid regulation or hide their behavior this surrenders at least part of the effectiveness of regulatory policies to firms and individuals decisions to voluntarily submit to regulation we study individuals decisions to avoid monitoring or regulation and thus enhance their ability to engage in unethical conduct we conduct a laboratory experiment in which participants engage in a competitive task and can decide between having the opportunity to misreport their performance or having their performance verified by an external monitor to study the effect of social factors on the willingness to be subject to monitoring we vary whether participants make this decision simultaneously with others or sequentially as well as whether the decision is private or public our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situati

nash equilibria of over the counter bargaining for insurance risk redistributions the role of a regulator this paper proposes a way to optimally regulate bargaining for risk redistributions we discuss the strategic interaction between two firms who trade risk over the counter in a one period model novel to the literature we focus on an incomplete set of possible risk redistributions this keeps the set of feasible contracts simple we consider catastrophe and longevity risk as two key examples the reason is that the trading of these risks typically occurs over the counter and that there are no given pricing functions if the set of feasible strategies is unconstrained we get that all nash equilibria are such that no firm benefits from trading a way to avoid this is to restrict the strategy space a priori in this way a nash equilibrium that is interesting for both firms may exist the intervention of a regulator is possible by restricting the set of feasible strategies for instance a firm has to keep a deductible on its prior risk we characterize optimal regulation by means of nash bargaining solutions

futile attempts at self control we investigate costly yet futile attempts at self control when consumption of a harmful product has a binary breakdown no breakdown nature and individuals tend to underestimate their need for self control considering time inconsistent preferences as well as temptation disutility we show that becoming more sophisticated can decrease welfare and investigate what kind of mistaken beliefs lead to low welfare with time inconsistent preferences being close to perfectly understanding one s preferences but assigning zero probability to true preferences induces the worst outcome jel d03 d11 d91

risk management of non maturing liabilities abstract risk management of non maturing liabilities is a relatively unstudied issue of significant practical importance non maturing liabilities include most of the traditional deposit accounts like demand deposits savings accounts and short time deposits and form the basis of the funding of depository institutions therefore the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits in this paper we propose a stochastic three factor model as general quantitative framework for liquidity risk and interest rate risk management for non maturing liabilities it consists of three building blocks market rates deposit rates and deposit volumes we give a detailed model specification and present algorithms for simulation and calibration our approach to liquidity risk management is based on the term structure of liquidity a concept which forecasts for a specified period and probability what amount of cash is available for investment for interest rate risk management we compute the value the risk profile and the replicating bond portfolio of non maturing liabilities using arbitrage free pricing under a variance minimizing measure the proposed methodology is demonstrated by means of a case study the risk management of savings accounts

interest rates and informational issues in the credit market experimental evidence from brazil summary this paper utilizes brazilian data to investigate interest rate sensitivity and informational issues associated with the credit demand of the middle income class in a large emerging economy this study s data were collected from an experiment in which credit offers with randomized interest rates were sent to recipients the results indicate that credit constraints and informational issues are important for both the lower middle class and higher middle class income groups interest rate reductions may be more effective for higher income groups

information sharing in credit markets we present a model with adverse selection where information sharing between lenders arises endogenously lenders incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers to the size of the credit market and to advances in information technology such incentives are instead reduced by the fear of competition from potential entrants in addition information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market these predictions are supported by international and historical evidence in the context of the consumer credit market a large body of literature on credit markets has shown that asymmetric information may prevent the efficient allocation of lending leading to credit rationing e g jaffee and russell 1976 stiglitz and weiss 1981 or to a wedge between lending and borrowing rates e g king 1986 in this literature informational asymmetries are taken to be exogenous lenders fail to observe some relevant characteristic or action of potential borrowers and have no way of learning about it in some countries however lenders can improve their knowledge about new customers by exchanging information with other lenders through information brokers generally known as credit bureaus the latter collect file and distribute the information voluntarily supplied by their members and operate on the principle of reciprocity lenders who do not provide data are denied access to the bureau s files in other countries instead these institutions do not exist the literature offers no guide to identify the factors that lead to endogenous communication between lenders this paper is an attempt to fill the gap information sharing is important for a number of reasons it may increase the degree of competitiveness within credit markets vives 1990 improve

the intertemporal dynamics of consumer lock in this article examines how dynamic changes in information cost structure and time preferences affect consumers search and switching behavior over time and lead to lock in the information cost structure is conceptualized as a trade off of initial setup costs and ongoing usage costs lock in is defined as consumers decreased propensity to search and switch after an initial investment which is determined both by a preference to minimize immediate costs and by an inability to anticipate the impact of future switching costs the results of three experiments support the proposed mechanism experiment 1 shows that a small initial investment is sufficient to produce lock in experiment 2 shows that the results of a prior investment on lock in are not due to psychological commitment but to a shift in relative costs of incumbent and new options experiment 3 shows that respondents fail to anticipate how their prior investment will lock them in

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

the failure of competition in the credit card market the bank credit card market containing 4 000 firms and lacking regulatory barriers casually appears to be a hospitable environment for the model of perfect competition nevertheless this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds moreover major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the periods 1983 88 the failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances copyright 1991 by american economic association

why do retired workers claim their social security benefits so early a potential explanation based on the cumulative prospect theory abstractsocial security provides longevity insurance for older americans according to expected utility theory models rational households who are not liquidity constrained should delay claiming th

the arbitrage free valuation and hedging of demand deposits and credit card loans abstract using a market segmentation argument this paper uses the interest rate derivative s arbitrage free methodology to value both demand deposit liabilities and credit card loan balances in markets where deposits loan rates may be determined under imperfect competition in this context these financial instruments are shown to be equivalent to a particular interest rate swap where the principal depends on the past history of market rates solutions are obtained which are independent of any particular model for the evolution of the term structure of interest rates

exploiting naivete about self control in the credit market we develop a model of the credit market where competitive lenders oer long term contracts specifying a non linear schedule of possible repayment schedules to borrowers who may dier both in their taste for immediate gratication and their prior beliefs about that taste the equilibrium contract to a borrower with given beliefs is discontinuous it features an advantageous option involving fast repayment and a penalty for deviating and repaying later these predictions seem to resemble some salient features of many credit card and mortgage contracts for fully sophisticated borrowers the discontinuity acts as a commitment device and yields fast repayment but all other borrowers even those with an arbitrarily small amount of naivete end up delaying repayment despite the penalty and receive little benet from commitment furthermore because they believe they will repay early they underestimate the cost of credit and hence borrow too much non sophisticated borrowers cross subsidize sophisticated borrowers while sophisticated borrowers discipline rms by preventing very exploitative contracts we identify natural conditions under which the above results obtain even if

cross selling switching costs and imperfect competition in british banks this paper attempts to evaluate the competitiveness of british banking in the presence of cross selling and switching costs during 1993 2008 it presents estimates of a model of banking behaviour that encompasses switching costs as well as cross selling of loans and off balance sheet transactions the evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period as a result of weaker competitiveness in the loan market additionally the weaker competitiveness in the loan market appears to facilitate the cross selling behaviour of british banks which helps explain the rapid growth of non interest income during the last two decades