Do consumers choose the right credit contracts?
By: Sumit Agarwal ... [et al.].
Contributors: Federal Reserve Bank of Chicago. Research Department
Series: Working paper series -- WP-2006-11; Working paper series (Federal Reserve Bank of Chicago. Research Department : Online) -- WP-2006-11.
Publisher: Federal Reserve Bank of Chicago
Published: 2006
Place of publication: Chicago, Ill.]
Language: eng
Format: [electronic resource] /
Description: "A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions.  We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice.  The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate.  To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa.  We find that on average consumers chose the contract that ex post minimized their net costs.  A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs.  Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract.  Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub- optimal contracts without switching"--Federal Reserve Bank of Chicago web site.
Notes: Title from PDF file as viewed on 11/13/2006.

Includes bibliographical references.

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Mode of access: World Wide Web.