Competing for Customers: A Search Model of the Market for Unsecured Credit

Joint with: Lukasz A. Drozd

This paper proposes a theory of the unsecured credit market with explicit frictions of soliciting and screening credit account customers. Banks in the model pay a fixed cost to target their loan offers to a customer with afore-chosen characteristics. A loan contract specifies a revolving line of credit and a constant interest rate to which the bank is committed. Access to unsecured credit is endogenous in the sense that in each instance of time households receive an endogenous number of offers from which they select the best one. The calibrated model reproduces the main features of the unsecured credit market in the US: high indebtedness, high bankruptcy rate and high chargeoff rates. We use the model to perform a disciplined exercise of reducing the cost of soliciting and screening credit customers to account for the rise of bankruptcy related statistics and growing indebtedness of US households. The change in the cost is carefully chosen to account for the observed change in credit card solicitations that occurred during this time period.

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