Adverse selection in credit card market
Author and year of writing:
Lawrence Ausubel
June 17, 1999
Partial summary:
When a party (informed) has information related to its (uninformed) trading partner, the informed party may find it beneficial to trade only in a relatively unfavorable information state from the perspective of the uninformed party. Therefore, a company that offers contracts to the public may find that the composition of the customer base that accepts the company's contracts is lower than that of the public. The specific contract terms provided by the company may affect the composition of the customer base, and in some information environments, adverse selection may lead to the complete collapse of the market (George A. Akerlof, 1970). Many of the most economically meaningful meanings of adverse selection come from the credit market. The high interest rate charged to borrowers may lead to adverse selection of default probability, which may lead banks to implement credit rationing under the environment of high interest rate (Joseph E. Stiglitz and AndrewWeiss, 198 1). Competition along certain dimensions of credit card pricing may lead to unfavorable selection, weaken the usual effect of competition, and lead to sticky interest rates and extraordinary profits (Lawrence M. Ausubel, 199 1). In addition, when the borrower has the opportunity to participate in signaling behavior, the same asymmetric information structure as in the adverse selection model will produce signaling stories, which is of great significance to the investment and capital structure of enterprises (for example, see Sudipto Bhattacharya, 1979 and Stewart C. Myers and Nicholas S. Majluf, 1984). However, despite the rapid development of economics and finance literature, which consists of hundreds of articles, and discusses the meaning of adverse selection in the credit market, few empirical studies convincingly prove the existence of adverse selection as a realistic phenomenon in the credit market. The purpose of this paper is to present convincing direct evidence of adverse selection in a specific credit market. This kind of empirical research is quite risky. It is often argued that almost any conclusion can be drawn from an appropriately selected economic model with incomplete information. However, to some extent, adverse selection can be proved to be a real empirical phenomenon in the credit market, so we can be confident that there is at least one important component.
Read the full text in PDF format: This is an important issue in the banking sector, as cardholders seek to transfer their revolutionary credit to the lowest-cost lending institutions. This "search and switch" behavior will be considered downward.
The pressure of credit card interest rate. Previous research on the credit card market focused on why its interest rate is consistently higher than other types of consumer loans. One explanation put forward is the inhibition of high search cost in this market, especially for cardholders with large balances, whose credit rejection is more likely.
It is high. The latest development of the credit card industry-especially the truth-
The 1988 Loan Act and the sharp increase in direct bidding have greatly changed the environment of this market. Due to this new environment and the improvement of data availability, the problem of credit card search needs to be re-examined.
In this paper, consumers with rejection probability are determined.
And test whether this probability has any effect on their search tendency. it
This is by analyzing (i) the influence of large balance on the possibility of rejection of consumers' credit applications, and (ii) how these factors-large balance and rejection possibility-affect consumers' search tendency. When testing the search cost hypothesis, the endogenous problem between consumer search and rejection possibility is dealt with by estimating the simultaneous equation model. The results given here show that there is no evidence that search costs prevent consumers.
1990s, or high balance. This is officially called the Fair Credit Card and Charge Card Disclosure Act of 1988. Cardholders who are more likely to be rejected or low-balance cardholders. In the next section, we will review the relevant literature of this market and discuss the latest changes in the market environment. The third section discusses our methods and improvements.
Recent data. The fourth section introduces our results. Finally, the conclusion of the fifth section is
Summarize our findings ....
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http://www.econ.ohio-state.edu/pdf/ldunn/wp02-03.pdf
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