Regulatory Intervention in Markets for Consumer Financial Products: The Case of Credit Cards

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 U.S. consumers borrowing at high and very dispersed interest rates. Our framework includes two main features that may explain these patterns—endogenous search effort and product differentiation— and our calibration suggests that low search effort mostly accounts for them. The calibrated model implies that caps reduce credit supply and curb lenders’ market power, with minimal aggregate welfare effects, whereas higher compliance costs unambiguously