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SUMMARY:Precommitments for Financial Self-Control: Evidence Before and Aft
 er the 2003 Korean Credit Crisis
DTSTART:20150220T103000
DTEND:20150220T120000
DTSTAMP:20260408T055748Z
UID:2427c717f43ac9744727f7f4b87da3079a69c742c40d405f6cdc0450
CATEGORIES:Conferences - Seminars
DESCRIPTION:John RUST (University of Maryland)\nWe analyze a new data set 
 on installment borrowing decisions of two samples of customers of a credit
  card company drawn before and after the 2003 Korean credit crisis. In an 
 attempt to increase its market share\, the company more or less randomly o
 ffers its customers free installments\, i.e. opportunities to finance cred
 it card purchases via installment loans at a zero percent interest rate fo
 r durations up to twelve months. We exploit these offers as a quasi-random
  field experiment to better understand consumer demand for credit. Althoug
 h there is considerable customer-level heterogeneity in installment usage\
 , we show that following the credit crisis\, the average take-up rate of f
 ree installment offers fell dramatically: customers chose them only 20% of
  time they were offered. Further\, we provide evidence of pervasive precom
 mitment behavior by individuals who decided to take free installment offer
 s. For example\, we estimate that of the subset of 10 month free installme
 nt offers that are taken\, only 18% are taken for the full 10 month term a
 llowed under the offer. In the other 82% of these offers\, customers preco
 mmit at the time of purchase to pay the balance in fewer than 10 installme
 nts. Thus\, only 3.6% (18% × 20%) of all 10 month free installment offers
  are taken for the full 10 month duration. It is challenging to explain th
 is behavior using standard expected utility models since there are no pre-
 payment penalties and the transactions costs involved in choosing these lo
 ans are small: rational customers should take every installment offer for 
 the maximum allowed term when the interest rate is 0%. One explanation for
  this behavior is that consumers have financial self-control problems and 
 resist the temptation to take interest-free loan offers. If they absolutel
 y must borrow\, most consumers choose repayment terms that are shorter tha
 n the maximum allowed term to avoid becoming excessively indebted. We find
  that free installment offers did not shift much before or after the 2003 
 credit crisis: instead\, consumers were much more likely to take these off
 ers before the crisis\, and much less likely to take them after the crisis
 . One interpretation is that consumers experienced a lack of financial sel
 f-control prior to the crisis\, and dramatically adjusted their behavior t
 o avoid the “temptation” of interest-free loans in the post-crisis per
 iod.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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