Abstract

We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe a large dispersion of interest rates at which U.S. consumers borrow.

Our framework includes two main features that may explain this dispersion: endogenous search effort/inattention and product differentiation. Our calibration suggests that low search effort accounts for almost all the dispersion in interest rates, whereas product differentiation is negligible.

The calibrated model implies that price caps may curb lenders’ market power, but may also reduce borrowers’ search effort, with potentially ambiguous aggregate welfare effects.