Working Paper: NBER ID: w24849
Authors: Sara G. Castellanos; Diego Jiménez Hernández; Aprajit Mahajan; Eduardo Alcaraz Prous; Enrique Seira
Abstract: The tension between limiting default rates and expanding financial access in developing countries is particularly acute for credit card borrowing, which is increasingly how borrowers access formal credit. Concerns over high default rates have led to contract-term restrictions such as higher minimum payments and interest rate ceilings, despite limited evidence on their effectiveness. We use a nationwide RCT to study new borrower responses to large experimental contract-term changes for a card that accounted for 15% of all first-time formal loans in Mexico. We find default is high and unresponsive to even large interest rate declines for the newest borrowers, and that a doubling of the required minimum payment does not reduce default. Matching the experimental subjects to their administrative employment histories, we find that unemployment shocks are common for newer borrowers and that plausibly exogenous job separation shocks have large effects on default.
Keywords: Credit Cards; Default Rates; Employment Shocks; Randomized Controlled Trial; Financial Inclusion
JEL Codes: D14; D18; D82; G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| job separation during mass layoffs (J65) | probability of default (G33) |
| reducing the annual interest rate from 45% to 15% (E43) | default rates (E43) |
| doubling the required minimum payment from 5% to 10% (G51) | default rates (E43) |
| contract term changes (K12) | default rates (E43) |
| borrower experience (G51) | default rates (E43) |