rates and average times associated with various dimensions of the collection effort, the cost per problem account by income of the credit user was estimated (see Table 2). The results suggest that lower income credit users that become "problems" (i.e., require some sort of collection effort, ranging from phone calls or letters to prosecution and/or write-offs) tend to generate higher costs than the higher income users that become collection problems. Since problems are more frequent for lower income families, they generate a disproportionate amount of the collection cost (which make up roughly 40% of out-of-pocket costs for the credit operation). These findings suggest that lower income consumers receive a considerable subsidy as a class in their use of department store credit. This is consistent with the finding that banks will not extend credit to many of these lower income individuals on bank credit cards (and more likely when the potential for a subsidy by department store cash buyers is admitted). Add to this the likelihood that lower income consumers have lower average purchases per charge, thus generating higher processing cost than higher and the case for a subsidy from higher income users to lower income users, income users looks quite strong. The case for a reverse subsidy, from low to high income users, would seem now to rest primarily on the payment of 50¢ minimums. It was already shown that the low income users are as frequent free riders as the very high income users. charge of 50 or less were paid, it does appear that minimums are paid by lower income families more frequently than by higher income families (see Table 1, last column). However, such payments were made in only 4% of the months in the sample, while substantially more than 30% of the months were revolving months. Thus, the effect does not seem to be very important, Looking at all months in which a finance and would seem justified based on the expense of billing such small amounts. In summary, it would appear that among credit users alone, the lower income consumers are the largest recipients of any subsidies that might be forthcoming, primarily because of the rather disproportionate amount of collection cost generated by this group, but also due to higher rates of free riding and to the likelihood that average sales per charge are lower. High income users would seem to benefit most from the value of the free ride while the $10,000-$20,000 income user pays most of the finance charge revenue to cover these costs. If revenues are inadequate to cover the costs of extending credit as many believe and several studies have shown, then the issue is more complex, as cash buyers will be subsidizing credit users. Which income groups ultimately benefit from this is not entirely obvious and further work is needed to clarify this question. It is clear that those denied credit for whatever reason may have substantial costs imposed on them in the form of higher costs for some types of consumption services. When credit is rationed, it is the lower income consumer that invariably loses access to credit and its corresponding benefits. To the extent that he must subsidize the credit user through higher prices, his plight is worsened. Any changes in the regulatory environment must then be carefully examined for their implications for the distribution of income. (NR) Account holder was reached when called. Account holder was called but not reached. aEfforts to locate delinquent account holders through central information agencies. The firm sends one of its own representatives to try to collect the account. Since supervisor salaries are higher, their time is counted separately. |