Working Paper: CEPR ID: DP17733
Authors: Sumit Agarwal; Andrea Presbitero; Andre F. Silva; Carlo Wix
Abstract: We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
Keywords: household finance; credit cards; financial sophistication; rewards
JEL Codes: G21; G40; G51; G53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reward credit cards (G51) | higher unpaid balances (H69) |
| reward credit cards (G51) | more spending (H59) |
| higher unpaid balances (H69) | exploitation of overborrowing behavior of naive consumers (G51) |
| banks incentivize the use of reward cards by offering lower interest rates compared to classic cards (G21) | increased use of reward cards (E40) |
| lower FICO scores (G51) | suboptimal repayment behavior (G51) |
| suboptimal repayment behavior (G51) | higher costs for naive consumers (D11) |
| reward cards exploit the overborrowing behavior of naive consumers (G51) | disparities in financial markets (G19) |
| lower financial sophistication (G53) | misallocation of repayments (G51) |