Private information and price regulation In the US credit card market
Author(s)Nelson, Scott Thomas
Massachusetts Institute of Technology. Department of Economics.
James M. Poterba.
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Lenders typically learn new information about their borrowers over time but can be restricted from repricing debt in response to this information. I study a leading example of such re-pricing restrictions, the 2009 Credit CARD Act, to ask how such restrictions affect credit market efficiency. Using a near-universe of US consumer credit card account data as well as a large random sample of US consumer credit reports, I show evidence that the Act's restrictions had two competing effects: on the one hand, a decoupling between prices and default risk on existing loans over time, which engenders adverse selection through higher attrition of safe borrowers; on the other hand, lower markups on borrowers revealed to be inelastic, and hence lower price dispersion in the market overall. To quantify these two forces' net effect on market efficiency, I build a model of a competitive credit market with private information and changing borrower types over time, and I use the model to ask whether, and for whom, the Act's restrictions bring prices closer to an efficient benchmark of prices equaling marginal costs. While fully estimating the model remains a goal for future work, I here show preliminary results of how the model estimation is proceeding.
Thesis: S.M., Massachusetts Institute of Technology, Department of Economics, 2017.Cataloged from PDF version of thesis.Includes bibliographical references (pages 33-36).
DepartmentMassachusetts Institute of Technology. Department of Economics.; Massachusetts Institute of Technology. Department of Economics
Massachusetts Institute of Technology