Pricing Returned Check Charges under Asymmetric Information

Deskripsi

Udell develops a theoretical model where banks face credit losses from "bad funds" deposits and overdrafts, with consumers varying in their probabilities of bankruptcy (high-risk vs. low-risk). The model demonstrates that competitive banks may set NSF fees above marginal processing costs to offset cross-subsidization between customer types, leveraging deposit-hold schedules and minimum balance requirements as complementary tools. Empirical observations, such as the disparity between NSF and stop-payment fees, support the hypothesis that banks use multidimensional pricing to optimize risk management.