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Relative prices and product substitution: Evidence from shocks to consumer credit interest rates

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  • Lukas, M.
Abstract
This study examines the borrowing patterns resulting from product substitution in consumer credit. Based on a unique dataset with monthly data on fixed-rate installment and variable-rate revolving consumer credit, I find that borrowers are likely to substitute revolving credit for installment credit when the former is less costly according to a simple price-based decision rule. This effect is weaker for new clients. Borrowers who are likely to substitute revolving credit for installment credit are more likely to commit to minimum repayments, choose credit limits which resemble those of installment loans, and repay more than borrowers choosing revolving credit without applying that rule, thereby carrying less debt and paying less interest. These results shed new light on the potential consequences of product substitution in the credit market.

Suggested Citation

  • Lukas, M., 2019. "Relative prices and product substitution: Evidence from shocks to consumer credit interest rates," Journal of Behavioral and Experimental Finance, Elsevier, vol. 21(C), pages 39-49.
    • Handle: RePEc:eee:beexfi:v:21:y:2019:i:c:p:39-49
    DOI: 10.1016/j.jbef.2018.10.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Household finance; Consumer credit; Banking; Financial institutions;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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