#05-25
Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence
Paul S. Calem, Michael B. Gordy and Loretta J. Mester
Abstract: To explain persistence of credit card interest rates at relatively high levels, Calem and Mester
(AER, 1995) argued that informational barriers create switching costs for high-balance customers. As
evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households
were more likely to be rejected when applying for new credit. In this paper, we revisit the question using
the 1998 and 2001 SCF. Further, we use new information on card interest rates to test for pricing effects
consistent with information-based switching costs. We find that informational barriers to competition
persist, although their role may have declined.
Keywords: Credit cards, consumer switching costs, search, adverse selection
JEL classifications : D82, G2
