ABSTRACT
In order to assess the effect of risk on the APRs charged by banks, we construct a more comprehensive range of risk measures than used in previous studies. Cardholder risk measures comprise: Fair Issac Corporation (FICO) credit score; presence of unpaid credit card debt in the previous 12 months; and outstanding credit card debt.5 These measures allow us to identify patterns of risk from a temporal perspective (short-and long-term risks), and as such represent a significant improvement on previous empirical studies that only use outstanding card debt to differentiate between high-and low-risk cardholders.6 We utilize a two-stage least squares (2SLS) and a two-step efficient generalized method of moments (IV-GMM) approach to control for potential endogeneity biases in the empirical specification.7
