Learning in the Credit Card Market

37 Pages Posted: 15 Feb 2008 Last revised: 9 Oct 2022

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

John C. Driscoll

Board of Governors of the Federal Reserve System

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

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.

Suggested Citation

Agarwal, Sumit and Driscoll, John C. and Gabaix, Xavier and Laibson, David I., Learning in the Credit Card Market (February 2008). NBER Working Paper No. w13822, Available at SSRN: https://ssrn.com/abstract=1093660

Sumit Agarwal

National University of Singapore ( email )

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John C. Driscoll

Board of Governors of the Federal Reserve System ( email )

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HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

Xavier Gabaix (Contact Author)

Harvard University - Department of Economics ( email )

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David I. Laibson

Harvard University - Department of Economics ( email )

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