In many countries, banks lend to firms controlled by the bank's owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. Related lending is prevalent (20% of commercial loans) and takes place on better terms than arm's-length lending (annual interest rates are 4 percentage points lower). Related loans are 33% more likely to default and, when they do, have lower recovery rates (30% less) than unrelated ones. The evidence supports the view that rather than enhance information sharing, related lending is a manifestation of looting.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We study how consumers allocate debt across credit cards they already hold using new data on credit card activity for a representative sample of consumers with two homogeneous cards in Mexico. We find that relative prices are a very weak predictor of the allocation of debt, purchases, and payments. On average, consumers pay 31 % above their minimum financing cost. Evidence on cross-card debt elasticities with respect to interest rates and credit limits show no substitution in the price margin. Our findings offer evidence against the cost-minimizing hypothesis and provide support to behavioral explanations. Keywords: Credit cards, household finance, consumer behavior, Mexico. JEL Classification: D12 D14, D40, G02, G20, G28. Terms of use: Documents inResumen: Estudiamos cómo los consumidores distribuyen su deuda entre las tarjetas de crédito que ya tienen usando datos nuevos de actividad en tarjetas de crédito para una muestra representativa de consumidores con dos tarjetas homogéneas en México. Encontramos que los precios relativos son un predictor muy débil de la distribución de deuda, compras y pagos. En promedio los consumidores pagan 31 % por encima de su costo mínimo de financiamiento. La evidencia sobre la elasticidad cruzada entre tarjetas con respecto a las tasas de interés y los límites de crédito muestra nula sustitución en el margen de precio. Nuestros resultados ofrecen evidencia en contra de la hipótesis de minimización de costos y apoyan explicaciones basadas en economía del comportamiento. Palabras Clave: Tarjetas de crédito, financiamiento de hogares, comportamiento del consumidor, México.* We are grateful to Jon Levin and Liran Einav, for numerous discussions and comments. We thank Susan

Most cardholders have more than one credit card, yet, it is not evident how these individuals manage their accounts. In this paper we construct a novel data set that includes information on all the credit cards held by more than 10,000 consumers in Mexico in 2004 and 2005 and empirically study the intra-temporal allocation of debt, payments and purchases among the credit cards consumers already hold. We find that the difference in the interest rates between homogeneous cards is not an important determinant of allocations. On average, cardholders forego potential savings for a sum that amounts to 16% of their financing cost. We show that non-price determinants of allocations have more explanatory power than interest rates. We find that consumers tend to put a larger fraction of their monthly payments and purchases on the card they spent more on during the preceding billing period, regardless of their interest rate ranking. We explore potential explanations for these findings including unawareness of the interest rates, small stakes, mental accounting and financial unsophistication. Although we cannot fully disregard some hypotheses, the most compelling explanation relates to mental accounting and financial unsophistication. The low price sensitivity can explain why high interest rates prevail in this market, regardless of any search or switching cost. From a policy perspective, our conclusions suggest that financial education could enhance competition in credit card markets

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We study how consumers allocate debt across credit cards they already hold using new data on credit card activity for a representative sample of consumers with two homogeneous cards in Mexico. We find that relative prices are a very weak predictor of the allocation of debt, purchases, and payments. On average, consumers pay 31 % above their minimum financing cost. Evidence on cross-card debt elasticities with respect to interest rates and credit limits show no substitution in the price margin. Our findings offer evidence against the cost-minimizing hypothesis and provide support to behavioral explanations.