Household Financial Behavior
Paper Session
Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)
- Julia Fonseca, University of Illinois
Rewards and Consumption in the Credit Card Market
Abstract
Reward programs are often a prominent feature of credit cards. Collaborating with a leading bank in China, I combine proprietary consumer-level data and a survey to study the causal effect of rewards on consumption and consumers' subjective expectations. I leverage a fuzzy regression discontinuity (RD) design to show that a more generous reward design causes consumption increases across both reward-earning and non-reward-earning categories. Applying the fuzzy RD to the survey data, I find that consumers correctly understand the impact of reward design on reward-earning consumption but underestimate its effect on total consumption. Using a stylized model, I study the implications of this misperception for market structure and welfare. My calibration results show that consumer misperceptions incentivize banks to offer more generous rewards, which ultimately diminishes market efficiency and leads to a cross-subsidy from less to more sophisticated consumers.Consumer Choice and Corporate Bankruptcy
Abstract
How costly is a corporate default? This question is central to corporate finance: according to the “tradeoff theory,'' firms choose a debt structure by trading off the benefits of debt with the costs of a potential default. A long literature shows that firms use low leverage despite large benefits of debt, implying default costs are large. Yet large firms often resolve defaults using Chapter 11 bankruptcy, avoiding liquidation and paying puzzlingly small direct legal costs. The prevailing explanation for this puzzle is that indirect bankruptcy costs must be large --- firms use little debt because a bankruptcy would scare off customers, destroying value. However, these indirect costs are notoriously difficult to quantify because unobserved negative shocks can cause both a bankruptcy and a loss of customers. Existing estimates of indirect costs confound defaults with the shocks that cause them. We develop a new method to measure the indirect costs of bankruptcy. Specifically, we use three incentivized experiments to estimate the causal effect of corporate bankruptcy on consumer demand for a bankrupt firm's products. We randomly vary the firm's bankruptcy status, holding all other firm and product details fixed. We find that knowledge of a Chapter 11 bankruptcy filing causally reduces a consumer's willingness to pay for the bankrupt firm's products by 18-35%, depending on the industry. We also find that up to 48% of consumers are aware of major corporate bankruptcies, so a bankruptcy impacts a large fraction of the bankrupt firm's consumer base. Estimating a structural discrete-choice model, we show that the indirect costs of bankruptcy can destroy 10% to 31% of producer surplus, depending on the industry. By these estimates, indirect bankruptcy costs alone are large enough for trade-off-theory models to explain observed leverage ratios. We show that these costs are unlikely to arise before bankruptcy. Our results thus provide novel support for the tradeoff theory, a pillar of corporate finance.Discussant(s)
Sheisha Kulkarni
,
University of Virginia
Benedict Guttman-Kenney
,
Rice University
Jacelly Cespedes
,
University of Minnesota
JEL Classifications
- G1 - General Financial Markets