Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129560
Authors: 
Livshits, Igor
MacGee, James
Tertilt, Michèle
Year of Publication: 
2014
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 14-07
Abstract: 
Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the "new" cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.
Subjects: 
Credit Cards
Endogenous Financial Contracts
Bankruptcy
JEL: 
E21
E49
G18
K35
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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