Victor Stango

Exponential Growth Bias and Household Finance

Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More-biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication. Copyright (c) 2009 the American Finance Association.

Pricing with Consumer Switching Costs: Evidence from the Credit Card Market

The credit card market is a natural setting for investigating the relationship between pricing and consumer switching costs. I find, using a detailed panel of credit card issuers, that switching costs are an important influence on pricing for commercial banks. The results are stronger for commercial banks with risky customer bases, suggesting that there is a relationship between default and switching costs. Switching costs appear to have almost no influence on pricing for credit unions, a result that is consistent with their status as not-for-profit entities. Copyright 2002 by Blackwell Publishing Ltd

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards

We test whether a nonbinding price ceiling may serve as a focal point for tacit collusion, using data from the credit card market during the 1980s. Our empirical model can distinguish instances when firms match a binding ceiling from instances when firms tacitly collude at a nonbinding ceiling. The results suggest that tacit collusion at nonbinding state-level ceilings was prevalent during the early 1980s, but that national integration of the market reduced the sustainability of tacit collusion by the end of the decade. The results highlight a perverse effect of price regulation.

The Economics of Standards Wars

Policymakers face an increasing number of questions regarding whether markets efficiently choose technological standards. In this essay I survey the economic literature regarding standards, focusing on arguments that markets move between standards either too slowly or too swiftly.

Fuzzy Math, Disclosure Regulation, and Market Outcomes: Evidence from Truth-in-Lending Reform

Consumer installment lenders prefer to market “low monthly payments” and shroud interest rates. Why not voluntarily disclose rates? We show that when an interest rate is not disclosed, most consumers substantially underestimate it using information on the monthly payment, loan principal and maturity. This “fuzzy math” or “payment/interest bias” helps explain why lenders shroud rates and thereby violate the Truth-in-Lending Act (TILA) even under the threat of fines and litigation. So does TILA have any teeth? We identify within-household interactions between policy-induced variation in the strength of TILA enforcement across lenders and time, payment/interest bias, and interest rates on actual loans. More biased households pay roughly 400 basis points more than less-biased households, but only on loans from lenders facing relatively weak TILA enforcement. The results link a cognitive bias to firm strategy and market outcomes, show that mandated disclosure can attenuate those links, and highlight the importance of enforcement costs.

Standards and public policy

Technological standards are a cornerstone of the modern information economy, affecting firm strategy, market performance and, by extension, economic growth. While there is general agreement that swift movement to superior technological standards is a worthwhile goal, there is much less agreement on the central policy questions: do markets choose efficient standards? How do standards organizations affect the development of standards? And finally, what constitutes appropriate public policy toward standards? In this volume, leading researchers in public policy on standards, including both academics and industry experts, focus on these key questions. Given the dearth of applied work on standards and public policy, this volume significantly advances the frontier of knowledge in this critical but understudied area. It will be essential reading for academic and industrial researchers as well as policymakers.

Competition And Pricing In The Credit Card Market

Many credit card issuers charge fixed rates that remain the same for three to five years, while the rest charge variable rates that are indexed to market rates. The presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously; variable rates move one-for-one with the index, while fixed rates stay constant. Empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous (yet seemingly contradictory) existence of high rate-cost margins and aggressive non-price competition for new customers, a phenomenon that existed in the credit card market in the early 1990s.

The Causes of Bargaining Failure: Evidence from Major League Baseball

Abstract Final‐offer arbitration in Major League Baseball provides an ideal setting for examining the empirical regularities that are associated with bargaining failure, since final offers, salaries, and player statistics, which provide the fundamental facts for the case, are all readily available. Using data for players eligible for arbitration for 1990–93, we conduct a wide variety of empirical tests regarding the relationship between aggressive offers and arbitration outcomes. We find that aggressive offers by players trigger arbitration and that more aggressive offers are associated with inferior financial outcomes in arbitration. Overall, clubs appear to outperform players in arbitration. Unexpectedly high or low offers are less common for players who have previously been through arbitration, which suggests that learning occurs. Our results are inconsistent with simple one‐sided asymmetric‐information models of arbitration. The results are more consistent with an optimism model or a model in which so...

Strategic Responses to Regulatory Threat in the Credit Card Market

In November 1991, federal lawmakers threatened to place a binding cap on credit card interest rates. I find that credit card rates declined following the regulatory threat, more so for larger and more politically visible credit card issuers. A set of stock market event studies reveals that interest rate cuts announced after the threat led to positive abnormal returns, both for announcing issuers and their rivals. This pattern does not exist for similar rate cuts made outside the period of regulatory threat. The results suggest that firms may experience private benefits to price-cutting when doing so mitigates regulatory threat, and spillover benefits when another firm cuts prices in order to ease regulatory threat.

Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs

We document cross-individual variation in U.S. credit card borrowing costs (APRs) that is large enough to explain substantial differences in household saving rates. Borrower default risk and card characteristics explain roughly 40% of APRs. The remaining dispersion exists because a borrower can receive offers and hold cards with wide-ranging APRs, as different issuers price the same observable risk metrics quite differently. Borrower debt (mis)allocation across cards explains little dispersion. But self-reported borrower search/shopping (along with instruments for shopping implied by Fair Lending law) can explain APR differences comparable to moving someone from the worst credit score decile to the best.