The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations


  • We would like to thank Jim Papadonis and Joanne Maselli for their support of this research project. We would also like to thank the editor (Debbie Lucas), an anonymous referee, Gene Amromin, Mike Delman, and Rich Rosen for helpful comments. We are grateful to Diana Andrade and Ron Kwolek for their excellent research assistance. The views expressed in this research, however, are those of the authors and do not represent the policies or positions of the Office of the Comptroller of the Currency, of any offices, agencies, or instrumentalities of the United States Government, or of the Federal Reserve Bank of Chicago.


Analyzing unique data from multiple large-scale randomized marketing trials of preapproved credit card solicitations by a large financial institution, we find that consumers responding to the lender's inferior solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and, thus, have higher reservation loan interest rates. We also find a more severe deterioration ex post in the credit quality of the booked accounts of inferior offer types relative to superior offers. After controlling for a cardholder's observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default ex post. Our results provide evidence on the importance of adverse selection effects in the credit card market.