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Research Abstracts Online
January 2009 - March 2010

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University of Minnesota Twin Cities
College of Liberal Arts
Department of Economics

PI: Varadarajan V. Chari

Competing for Customers: A Search Model of the Market for Unsecured Credit

These researchers have proposed a theory of the unsecured credit market with explicit frictions of soliciting and screening credit account customers. Banks in the model pay a fixed cost to target their loan offers to a customer with afore-chosen characteristics. A loan contract specifies a revolving line of credit and a constant interest rate to which the bank is committed. Access to unsecured credit is endogenous in the sense that in each instance of time households receive an endogenous number of offers from which they select the best one. The calibrated model reproduces the main features of the unsecured credit market in the U.S.: high indebtedness, high bankruptcy rate, and high chargeoff rates. The researchers use the model to perform a disciplined exercise of reducing the cost of soliciting and screening credit customers to account for the rise of bankruptcy-related statistics and growing indebtedness of U.S. households. The change in the cost is carefully chosen to account for the observed change in credit card solicitations that occurred during this time period.

Group Members

Lukasz Drozd, Department of Economics, University of Wisconsin, Madison, Wisconsin
Jaromir Nosal, Department of Economics, Columbia University, New York, New York