Konferenzbeitrag
Naïve Consumers and Financial Mistakes
Financial contracts are complicated and consumers often do not grasp them in their entirety. This may lead to financial mistakes. We develop a quantitative theory of unsecured credit and equilibrium default in a market with sophisticated and näive borrowers who sometimes misunderstand their contracts and make financial mistakes. Näives are more prone to mistakes without internalizing this fact. When signing debt contracts, we allow agents to trade off interest rates for penalty fees. These fees make financial mistakes costly. Näives choose inefficiently high penalty fees and cross-subsidize interest rates for sophisticates. We use this framework to analyze two unexplored features of the CARD act: clearer language requirements and a limit on penalty fees in financial contracts. Clearer contract terms lead to fewer financial mistakes by everyone, while limiting fees constrains mostly näive borrowers. Both policies reduce financial mistakes and increase the welfare of näive borrowers. The effects on sophisticates differ: clearer language and fewer mistakes benefit sophisticates too. However, limiting fees reduces the cross-subsidization sophisticates receive in equilibrium and consequently makes them worse off.
- Language
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Englisch
- Bibliographic citation
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Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2021: Climate Economics
- Classification
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Wirtschaft
Macroeconomics: Consumption; Saving; Wealth
Interest Rates: Determination, Term Structure, and Effects
General Financial Markets: Government Policy and Regulation
Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡
Contract Law
- Subject
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Consumer Credit
Näiveté
Financial Mistakes
Bankruptcy
CARDAct
Cross-Subsidization
- Event
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Geistige Schöpfung
- (who)
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Exler, Florian
Hansak, Alexander
- Event
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Veröffentlichung
- (who)
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ZBW - Leibniz Information Centre for Economics
- (where)
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Kiel, Hamburg
- (when)
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2021
- Handle
- Last update
- 10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Konferenzbeitrag
Associated
- Exler, Florian
- Hansak, Alexander
- ZBW - Leibniz Information Centre for Economics
Time of origin
- 2021
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