We host different speakers at our Economic Theory & Policy Seminar. 

Upcoming topics and speakers will be posted below.

24. May 2023, 12:30 until 13:30

Brown Bag Seminar / Florian Exler (Uni Wien) / Naïve Consumers and Financial Mistakes

Other

Brown Bag Seminar Series of the Economics Research Unit

 

Florian Exler, opens an external URL in a new window (Universität Wien)

"Naïve Consumers and Financial Mistakes" joint with AlexanderHansak (VGSE)

Financial contracts are complicated and consumers often do not grasp them
in their entirety. This may lead to financial mistakes. We develop a quantitative
theory of unsecured credit and equilibrium default where borrowers can sign debt
contracts that trade off interest rates for penalty fees. These fees make unforeseen
financial shocks—such as paying late or borrowing over limit—costly. The economy
is populated with sophisticated and naïve borrowers. Naïves face higher financial
uncertainty without internalizing this fact. They make financial mistakes as they
choose inefficiently high penalty fees. In equilibrium, these feescross-subsidize in-
terest rates for sophisticates. We use this framework to analyze two unexplored
features of the CARD act: transparency requirements and penalty fee limits. More
transparency leads to less financial uncertainty for naïve borrowers, while fee limits
constrain everyone. Both policies reduce financial mistakes and increase the welfare
of naïves. The effects on sophisticates, in contrast, are negative: If naïves make
fewer mistakes due to clearer language, sophisticates lose cross-subsidization and
experience welfare losses. The same holds true in the case of fee limits. When
high-fee contracts are banned, expected revenue from naïve fee payments falls and
interest rates rise. As a result, sophisticates experience a welfare loss.

Calendar entry

Event location


1040 Vienna
TU Wien - Economics, Wiedner Hauptstraße 8, (Sem.R. DB gelb 05 A, Freihaus Buidling, yellow area, 5th floor)

 

Public

Yes

 

Entrance fee

No

 

Registration required

No

Brown Bag Seminar / Florian Exler (Uni Wien) / Naïve Consumers and Financial Mistakes

Brown Bag Seminar Series of the Economics Research Unit

 

Florian Exler, opens an external URL in a new window (Universität Wien)

"Naïve Consumers and Financial Mistakes" joint with AlexanderHansak (VGSE)

Financial contracts are complicated and consumers often do not grasp them
in their entirety. This may lead to financial mistakes. We develop a quantitative
theory of unsecured credit and equilibrium default where borrowers can sign debt
contracts that trade off interest rates for penalty fees. These fees make unforeseen
financial shocks—such as paying late or borrowing over limit—costly. The economy
is populated with sophisticated and naïve borrowers. Naïves face higher financial
uncertainty without internalizing this fact. They make financial mistakes as they
choose inefficiently high penalty fees. In equilibrium, these feescross-subsidize in-
terest rates for sophisticates. We use this framework to analyze two unexplored
features of the CARD act: transparency requirements and penalty fee limits. More
transparency leads to less financial uncertainty for naïve borrowers, while fee limits
constrain everyone. Both policies reduce financial mistakes and increase the welfare
of naïves. The effects on sophisticates, in contrast, are negative: If naïves make
fewer mistakes due to clearer language, sophisticates lose cross-subsidization and
experience welfare losses. The same holds true in the case of fee limits. When
high-fee contracts are banned, expected revenue from naïve fee payments falls and
interest rates rise. As a result, sophisticates experience a welfare loss.