Private Information and Price Regulation in the US Credit Card Market

The 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act barred credit card lenders from discretionarily raising borrowers’ interest rates in response to new information. Using the near-universe of US credit card account data (covering roughly 90% of outstanding general-purpose balances across 17–19 large and midsize issuers) together with a large panel of consumer credit reports, the paper documents that the class of rate increases restricted by the Act affected over 50% of borrowing accounts annually before the Act; incidence dropped to nearly zero afterward, and the interquartile range of interest rates on newly-mature accounts compressed immediately by one-third. The paper then estimates a structural model of the credit card market featuring differentiated lenders competing à la Bertrand, consumers with dynamic discrete choice over lenders and borrowing status, private information types identified from equilibrium pricing, and flexible correlation between demand and risk. Imposing the Act’s restrictions in the estimated model reveals that consumer surplus rises at all credit scores — by roughly $600 for subprime and over $1,000 for prime and superprime consumers — despite partial market unraveling among the deepest subprime accounts. The net surplus gains are driven by two forces: (1) a fall in lender markups (pre-CARD-Act median-risk subprime markups exceeded 40 percent), and (2) the insurance value of rate lock-in for borrowers whose credit risk deteriorates over time. Counterfactual analysis shows that if pre-CARD-Act markets had been perfectly competitive (zero markups), the Act would have induced complete market unraveling and consumer surplus would have fallen by $100–$600 per consumer.

Scott T. Nelson | Macro Paper Warehouse

Private Information and Price Regulation in the US Credit Card Market