Consumer Law

Paper on Whether Consumers Learn to Avoid Triggering Credit Card Fees

By Jeff Sovern

Sumit Agarwal, John C. Driscoll, both of the Fed, Xavier Gabaix of NYU's Stern School, and David Laibson of Harvard's Economics Department have written "Learning in the Credit Card Market."  Here's the abstract:

Agents with more experience make better choices. We measure learning dynamics using a panel with four million monthly credit card statements. We study add-on fees, specifically cash advance, late payment, and overlimit fees. New credit card accounts generate fee payments of $15 per month. Through negative feedback - i.e. paying a fee - consumers learn to avoid triggering future fees. Paying a fee last month reduces the likelihood of paying a fee in the current month by about 40%. Controlling for account fixed effects, monthly fee payments fall by 75% during the first three years of account life. We find that learning is not monotonic. Knowledge effectively depreciates about 10% per month, implying that learning displays a strong recency effect.

Full post as published by CL&P Blog on August 13, 2008 (boomark / email).