Capping interest rates on credit can benefit consumers with low credit ratings
In this paper, the authors build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates. They focus on the credit card market, in which they observe US consumers borrowing at high and very dispersed interest rates despite receiving many credit card offers. Their calibration suggests that most borrowers examine few of the offers they receive, and thereby forego cards with low interest rates and high non-price benefits. The calibrated model implies that interest-rate caps reduce credit supply and significantly curb lenders’ market power, thereby increasing consumer surplus.
