Financial incentive, household spending, and debt accumulation

Activity: Talks or PresentationsPublic Lecture

Description

Rewards have increasingly become a prevailing and effective way to attract new credit card users or stimulate spending by existing card users. Why do banks provide cash-back rewards to their credit card customers? How effective is the reward scheme in stimulating credit card spending? What is the impact of rewards on a credit card user’s debt accumulation? Using a proprietary data set from a major U.S. credit card company, this paper explores these questions by studying the impact of cash-back rewards on credit card users before and during their enrollment in the cash rewards scheme.
We find evidence that credit card users increase their monthly spending by $70 during the first quarter after offered the rewards; however, their monthly debt increases disproportionally by $120. Monthly debt outweighing spending indicates that monthly payments drop more than the marginal growth in spending from cash-back rewards. Further evidence suggests that credit card users offset their growing spending and debt on the card with cash-back by reducing their spending and debt on their other credit cards.
Heterogeneity tests indicate that inactive card users (those who do not use their card prior to the cash-back program) increase their spending and debt more than card users with debt before the cash-back program. We also find heterogeneous responses of card users depending on their demographic and credit constraint characteristics.
Period13 Apr 2021
Event titleECON Brownbag Seminars
Event typeSeminar
OrganiserDepartment of Economics
LocationHong Kong, Hong KongShow on map
Degree of RecognitionInstitutional