Revolving credit lines and targeted search

Abstract

I propose a model of revolving credit lines and targeted search to analyze what accounts for the profitability of the U.S. credit card industry. My analyses lead to two main findings. First, the search friction has minimal impact on the level of profitability of the credit card industry. Most of the profitability is a result of the lender choosing the terms of contract. Second, improved information about consumers accounts for the fall in profitability since the 1980s. Consistent with the data, lenders respond to more information by increasing credit card limits and lowering markups.