2021/08/05 by Paolina C. Medina, Jose L. Negrin, José Luis Negrín
Business, Management and Accounting · Economics, Econometrics and Finance · #Financial Literacy, Pension, Retirement Analysis #Housing Market and Economics #Banking stability, regulation, efficiency
paper · doi:10.1287/mnsc.2021.4006
This paper argues that thresholds in financial contracts act as implicit nudges in consumers’ decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a 1-percentage point change in minimum payments leads to a 0.87-percentage point change in actual payments, both expressed as a percentage of total balances. We decompose the effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The latter captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic: the tendency of consumers to pay whole-number multiples of the minimum payment. This paper was accepted by Kay Giesecke, finance.