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Working Paper
Dynamic Pricing of Credit Cards and the Effects of Regulation
We construct a two-period model of revolving credit with asymmetric information and adverse selection.In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex ante ...
Working Paper
Dynamic Pricing of Credit Cards and the Effects of Regulation
We construct a two-period model of revolving credit with asymmetric information and adverse selection. In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex-ante ...
Working Paper
The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act
This paper analyzes how bank regulation that promotes greater access to credit impacts the financing of targeted small firms. It develops a model where banks compete with trade creditors to fund small firms and applies it to study the effects of the Community Reinvestment Act (CRA). The empirical tests reveal that a CRA-induced increase in bank loans reduces small firms’ use of relatively expensive trade credit. The effect is more profound in low- and medium-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that ...
Working Paper
Interchange Fees in Payment Networks: Implications for Prices, Profits, and Welfare
In a two-sided model of the payment card market, we introduce a specific form of elastic demand (constant elasticity), merchant market power, ad valorem fees, and cash as an alternative. We derive the “credit card tax,” consisting of an endogenously determined interchange fee and any rewards paid. We characterize how this tax influences prices, profits, and welfare. We also examine how these relationships vary under different assumptions about the elasticity of demand, merchant market power, and differentiation between cash and credit. Under the assumptions of our model, by endogenizing ...