Date of this Version
The Review of Corporate Finance Studies
We analyze an experiment conducted by a large U.S. bank that offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. We find that on average consumers chose the credit contract that minimized their costs. A substantial fraction of consumers (about 40%) still chose the suboptimal contract. Nonetheless, the probability of choosing the suboptimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors are more likely to subsequently switch to the optimal contract.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in The Review of Corporate Finance Studies following peer review. The version of record Sumit Agarwal, Souphala Chomsisengphet, Chunlin Liu, Nicholas S. Souleles; Do Consumers Choose the Right Credit Contracts?. Review of Corporate Finance Studies 2015; 4 (2): 239-257. doi: 10.1093/rcfs/cfv003 is available online at: https://doi.org/10.1093/rcfs/cfv003
banks, depository institutions, micro finance institutions, mortgages, Portfolio Choice, investment decisions
Agarwal, S., Chomsisengphet, S., Liu, C., & Souleles, N. S. (2015). Do Consumers Choose the Right Credit Contracts?. The Review of Corporate Finance Studies, 4 (2), 239-257. http://dx.doi.org/10.1093/rcfs/cfv003
Date Posted: 27 November 2017
This document has been peer reviewed.