You’re right that not every case is equally severe. But even in your relatively mild case, it’s still a “gotcha.” The term is there because the credit card company knows that people will sometimes not understand or will forget. It’s got nothing to do with efficiently matching people who want to lend money with people who want to borrow money (which is one of the primary legitimate function of credit markets), it’s got to do with figuring out how best to screw people over. Since there is no reason to believe that that contract got to be that way for any efficient purpose, there’s no reason for any great reluctance to interfere with it through policy.
Ah, but now you’re changing the argument! In the post, you argued that it’s OK to interfere because people are being tricked (an argument for which I have some sympathy). Now, you’re arguing that it’s OK to interfere because the only purpose of the cards is to match borrowers with lenders. That, I dont agree with at all.
People choose a card for many different reasons. I can imagine people choosing to (perhaps falsely) signal their high wealth by choosing a high-rate card (their friends will assume they pay it off every month). They might choose the “trick” card to give themselves an incentive to pay on time. They may enjoy trying to “outwit” others by paying the card off on time and letting others cover the issuer’s expenses.
In a competitive market, the money the company makes by “tricks” is competed down: other cards will find it profitable to enter the market and charge less (even if they use the same “tricks”). So a larger cost is borne by those who fall for the “tricks”. Still, those people might not be happier with the tricks removed.
For instance, suppose I forget to pay on time every five years (which is probably about right). And suppose my forgetting costs $60. Now, the government comes along and decrees that, instead of charging me $60 when I forget, they’ll charge me $1 a month regardless.
I wouldn’t like that. It might be irrational, but that’s still my preference. Haven’t you, the government, done me wrong by eliminating the “trick” that I understood but chose anyway? Does my being less happy than before rank at zero on your scale of costs and benefits?
(a) the universe OP is working in has the premise that creating efficient deals is why you should not regulate things
(b) people are being tricked by dealmakers
(c) regulating to stop people from being tricked does not deter efficient deals
you are saying “I’m not being tricked”—that’s a denial of assumption (b).
It may be true that there exist people who are not being tricked and who benefit from the existence of tricks.
On the other hand, that’s not the point. The point is that enough people ARE being tricked, to their detriment, that regulating the tricks will increase total welfare.
This is true regardless of whether or not you personally are being tricked.
OP also cited a paper discussing how tricks aren’t effected regularly by competition, so there is anecdotal evidence at least indicating that the government wouldn’t actually charge you $1 a month regardless.
A large part of your statement was addressing the factuality of (b) which is good, and I’m overall sympathetic to this objection, but you don’t seem fully aware of that being your point, and I disagree with the point in general.
Either those terms represent an efficient contract or they don’t. The most obvious way that they wouldn’t would be if they tricked you, and as a practical matter that is where most of the action is. Originally it sounded like you agreed that you were being tricked also, but in a milder sense. If you positively prefer those terms, then in your case they are efficient. But I rather doubt that these are really terms that you would have chosen.
As for the issue of competition, that’s not how it works. When Laibson presented the paper I referred to in the main post, my recollection is that he said that, while the credit card industry is quite competitive, the way that competition happens is that the companies use expensive promotions to identify myopic consumers. So competition doesn’t benefit consumers, and in the end it doesn’t even benefit the credit card companies! It’s pure social waste.
You’re right that not every case is equally severe. But even in your relatively mild case, it’s still a “gotcha.” The term is there because the credit card company knows that people will sometimes not understand or will forget. It’s got nothing to do with efficiently matching people who want to lend money with people who want to borrow money (which is one of the primary legitimate function of credit markets), it’s got to do with figuring out how best to screw people over. Since there is no reason to believe that that contract got to be that way for any efficient purpose, there’s no reason for any great reluctance to interfere with it through policy.
Ah, but now you’re changing the argument! In the post, you argued that it’s OK to interfere because people are being tricked (an argument for which I have some sympathy). Now, you’re arguing that it’s OK to interfere because the only purpose of the cards is to match borrowers with lenders. That, I dont agree with at all.
People choose a card for many different reasons. I can imagine people choosing to (perhaps falsely) signal their high wealth by choosing a high-rate card (their friends will assume they pay it off every month). They might choose the “trick” card to give themselves an incentive to pay on time. They may enjoy trying to “outwit” others by paying the card off on time and letting others cover the issuer’s expenses.
In a competitive market, the money the company makes by “tricks” is competed down: other cards will find it profitable to enter the market and charge less (even if they use the same “tricks”). So a larger cost is borne by those who fall for the “tricks”. Still, those people might not be happier with the tricks removed.
For instance, suppose I forget to pay on time every five years (which is probably about right). And suppose my forgetting costs $60. Now, the government comes along and decrees that, instead of charging me $60 when I forget, they’ll charge me $1 a month regardless.
I wouldn’t like that. It might be irrational, but that’s still my preference. Haven’t you, the government, done me wrong by eliminating the “trick” that I understood but chose anyway? Does my being less happy than before rank at zero on your scale of costs and benefits?
The impression I got was that:
(a) the universe OP is working in has the premise that creating efficient deals is why you should not regulate things
(b) people are being tricked by dealmakers
(c) regulating to stop people from being tricked does not deter efficient deals
you are saying “I’m not being tricked”—that’s a denial of assumption (b).
It may be true that there exist people who are not being tricked and who benefit from the existence of tricks.
On the other hand, that’s not the point. The point is that enough people ARE being tricked, to their detriment, that regulating the tricks will increase total welfare.
This is true regardless of whether or not you personally are being tricked.
OP also cited a paper discussing how tricks aren’t effected regularly by competition, so there is anecdotal evidence at least indicating that the government wouldn’t actually charge you $1 a month regardless.
A large part of your statement was addressing the factuality of (b) which is good, and I’m overall sympathetic to this objection, but you don’t seem fully aware of that being your point, and I disagree with the point in general.
Either those terms represent an efficient contract or they don’t. The most obvious way that they wouldn’t would be if they tricked you, and as a practical matter that is where most of the action is. Originally it sounded like you agreed that you were being tricked also, but in a milder sense. If you positively prefer those terms, then in your case they are efficient. But I rather doubt that these are really terms that you would have chosen.
As for the issue of competition, that’s not how it works. When Laibson presented the paper I referred to in the main post, my recollection is that he said that, while the credit card industry is quite competitive, the way that competition happens is that the companies use expensive promotions to identify myopic consumers. So competition doesn’t benefit consumers, and in the end it doesn’t even benefit the credit card companies! It’s pure social waste.