Thursday, April 12, 2018 at 11:40am to 1:10pm
Uris Hall, 498
Alessandro Gavazza - London School of Economics
Regulatory Intervention in Consumer Search Market: The Case of Credit Cards
Abstract: Data on U.S. credit card markets display a large dispersion of interest rates at which consumers borrow. To understand this dispersion, we build a search model with two additional features: search effort/inattention and product differentiation. We calibrate the model to match statistics on the interest rate distribution that borrowers pay. The model fits these data reasonably well. Our analysis implies that low search effort accounts for almost all the dispersion in interest rates, whereas product differentiation is negligible. We use the calibrated model to study regulatory interventions in credit markets, such as caps on interest rates and higher entry costs for lenders.