Adverse selection,search costs and sticky credit card rates |
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| Institution: | 1. School of Banking, University of Economics Ho Chi Minh City (UEH), 59C Nguyen Dinh Chieu, District 3, Ho Chi Minh City, Viet Nam;2. School of Business and Management, RMIT University Vietnam, 702 Nguyen Van Linh, District 7, Ho Chi Minh City, Viet Nam;3. Business School, University of the Fraser Valley, 33844 King Road, Office: C2423, V2S 7M8 Abbotsford, BC, Canada;1. Tsinghua University, China;2. Nankai University, China;3. Chinese University of Hong Kong, Hong Kong, China;1. CEPR, New York University, Stern School of Business, 44 W 4th Street, NY 10012, New York;2. NBER, and CEPR, Columbia Graduate School of Business Uris Hall 802, 3022 Broadway, NY 10027, New York;1. Henley Business School, University of Reading, Reading RG6 6UD, UK;2. Portsmouth Business School, University of Portsmouth, Portsmouth PO1 3DE, UK |
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| Abstract: | Several scholars of financial economics observed that during the 1980s, market interest rates declined continuously with little or no impact on credit card rates. Recently, Meyercord (1994), Sinkey and Nash (1993), and Sullivan and Worden (1995) recorded significant changes in the credit card market indicating an increased level competition. This study represents an attempt to determine the sensitivity of credit card rates to the costs of funds in the U.S. economy. The evidence from the Johansen Cointegration test confirms that credit card rates and cost of funds posses a long-run equilibrium relationship with one another. Furthermore, the results of the error correction models are indicative of a sluggish rate at which credit card interest rates adjust to the costs of funds. Between 1982 and 1994, credit card rates adjust to changes in the cost of funds at about 15 percent per quarter. These results represent anecdotal evidence for the validity of adverse selection, search and switch costs explanation that have been discussed in the financial contracting literature. |
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