At the same time, credit cards consistently earned higher returns than most other bank products. Using data from the Federal Reserve's 1989 Survey of Consumer Finances, the authors provide specific evidence about consumer behavior. The paper advances two theoretical arguments supporting the contention that credit card issuers face adverse selection problems. The authors find that credit card indebtedness is universally related to an individual's pro-pensity to comparison shop for terms. Consumers with substantial search costs tend to have big balances.
Card issuers face an adverse selection problem induced by search costs.
The authors find no evidence consumers underestimate their propensity to borrow. The authors find that households with larger balances are more likely to have experienced payment problems. These findings are evidence of adverse selection induced by switch costs. Thus, the authors' empirical findings support the view that competition in the credit card market is imperfect. These findings confirm bankers' arguments that credit card rates are sticky because consumers are not responsive to rate cuts.