DP13807 Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards

Author(s): Manolis Galenianos, Alessandro Gavazza
Publication Date: June 2019
Keyword(s):
JEL(s): D14, D83, G28
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13807

We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe U.S. consumers borrowing at high and very dispersed interest rates, despite receiving many credit card offers. Our framework includes two main features that may explain these patterns: endogenous effort of examining offers and product differentiation. Our calibration suggests that these patterns occur because borrowers do not examine most of the offers that they receive. The calibrated model implies that interest rate caps reduce credit supply modestly and curb lenders' market power significantly, leading to large gains in consumer surplus, whereas higher compliance costs unambiguously decrease consumer surplus.