Working Papers

“Rewards and Consumption in the Credit Card Market” (draft)

Abstract

Reward programs are often a prominent feature of credit cards. Collaborating with a leading bank in China, I combine proprietary consumer-level data and a survey to study the causal effect of rewards on consumption and consumers' subjective expectations. I leverage a fuzzy regression discontinuity (RD) design to show that a more generous reward design causes consumption increases across both reward-earning and non-reward-earning categories. Applying the fuzzy RD to the survey data, I find that consumers correctly anticipate the impact of reward design on reward-earning consumption but underestimate its effect on total consumption. Using a stylized model, I study the implications of this misperception for market structure and welfare. My calibration results show that consumer misperceptions incentivize banks to offer more generous rewards, which ultimately diminishes market efficiency and leads to a cross-subsidy from less to more sophisticated consumers.

“An Empirical Model of Endogenous Attention,” with T. Tony Ke and J. Miguel Villas-Boas (draft available upon request)

Abstract

Before making a choice, individuals can gradually gather information on multiple different possible alternatives. Analysts may observe how long the individuals gather information on each alternative, when individuals switch from gathering information on one alternative to gathering information on another alternative, and when individuals make a final choice. We develop an empirical model on this choice process, endogenizing the choice of which alternative the individual obtains information from at each point in time, and estimate the model with data from eye-tracking experiments. The empirical analysis yields estimates of the relative size of search costs, switching costs, and informativeness of search for information. Counterfactual analysis shows that higher switching costs reduce search duration and induce fewer attention switches; in comparison, higher search costs also reduce search duration but induce more attention switches. The model also delivers that there is a positive correlation between attention to an alternative and likelihood of that alternative being chosen, through the individuals choosing to learn more about the alternatives for which the individuals have beliefs of a higher preference.

“Interest Rate Misperception in the Credit Card Market,” with Xiao Yin (draft new as of March 2024!)

Abstract

We investigate the extent to which consumers misperceive the interest costs associated with credit card debt using a combination of administrative data and surveys. Through a randomized controlled trial with an information treatment, our results show that consumers are imperfectly informed about the interest cost of unsecured debt, and the resulting misperception induces excess debt-taking by 26\%, mainly originating from spending on luxury goods. To understand the formation of interest rate misperception, we uncover selective information acquisition to be a potential channel. We demonstrate that consumers tend to actively seek information about their borrowing status when they expect creditworthiness to be high, and they disproportionately pay more attention to favorable information when interest rates are low.

Work in Progress

“Income Misreporting in the Credit Card Market,” with Xiao Yin (draft coming soon)

Abstract

(Preliminary) In the process of acquiring credit cards, consumers often self-report their income levels, a practice that tends to be prone to unverified overstatements. We empirically investigate into the existence of such income misrepresentation and assess whether financial institutions take this potential exaggeration into account. Collaborating with a leading commercial bank in China, we survey consumers on their income growth rates. By utilizing these reported growth rates and current incomes, we infer the consumers' actual income at the time of their credit card application. Our findings indicate a significant degree of income over-reporting among consumers, with an average exaggeration of approximately 30%. Further, we employ a quasi-experimental approach to determine the causal effect of this income misreporting on the allocation of credit limits. Our results suggest that the bank does, in fact, take into account such misreporting behaviors: income exaggerated by 10% decreases credit limit by around 100 US dollars. This study provides insights into consumer behaviors in credit card applications and the corresponding response of financial institutions.