Credit cards are an important vehicle for spending and borrowing. Collaborating with a leading commercial bank in China, this dissertation consists of two chapters that explore how the design of credit card products can influence consumer behavior, alongside its implications for marketing strategies and consumer welfare.
The first chapter studies reward programs, often a prominent feature of credit cards. 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.
The second chapter, coauthored with Xiao Yin, investigates the extent to which consumers misperceive the interest costs associated with credit card debt using a combination of administrative data and surveys. Through a randomized controlled trial with an information treatment, our results show that consumers are imperfectly informed about the interest cost of unsecured debt, and the resulting misperception induces excess debt-taking by 26\%, mainly originating from spending on luxury goods. To understand the formation of interest rate misperception, we uncover selective information acquisition to be a potential channel. We demonstrate that consumers tend to actively seek information about their borrowing status when they expect creditworthiness to be high, and they disproportionately pay more attention to favorable information when interest rates are low.
