I'm an Assistant Professor of Finance at the University of Houston.  My research is on Household Finance  with a focus on how psychological biases in consumer behavior affect outcomes in  financial markets. 

Email: pcmedina@uh.edu

Working Papers

Do Saving Cause Borrowing? Implications for the Co-Holding Puzzle With Michaela Pagel (R&R  3rd round Journal of Finance)

We analyze an experiment involving 3.1 million bank customers who were encouraged to save through SMS messages. We first theoretically show that by examining their spending, saving, and borrowing responses we can distinguish between the leading explanations for co-holding liquid savings and credit card debt. Using a machine learning algorithm, we then predict individual-level treatment effects and find that the most responsive individuals reduce spending and increase their savings by 5.1% (225 USD PPP per month), while their credit card debt remains unchanged. We argue that these joint findings suggest people co-hold because they mentally separate savings and debt accounts.

Fintech Lending to Borrowers with No Credit History With Laura Chioda, Paul Gertler and Sean Higgins (R&R Journal of Financial Economics)

Despite the promise of FinTech lending to expand access to credit to populations without a formal credit history, FinTech lenders primarily lend to applicants with a formal credit history and rely on conventional credit bureau scores as an input to their algorithms. Using data from a large FinTech lender in Mexico, we show that alternative data from digital transactions through a delivery app are effective at predicting creditworthiness for borrowers with no credit history. We also show that segmenting our machine learning model by gender can improve credit allocation fairness without a substantive effect on the model’s predictive performance.

When Nudges Spill Over: Student Loan Borrowing under the CARD Act  With Alex Brown and Daniel Grodzicki

Title 3 of the Credit Card Accountability, Responsibility, and Disclosure Act (2009) limited the marketing and sale of credit cards to college students, nudging them away from these high-rate products. While reducing card use, we find the nudge also prompted an 8.4\% rise student loan debt, 15\% among the less affluent. To assess the benefits of this substitution, we design a survey that reveals significant sub-optimal financial decision-making among students tied to higher card debt. We provide model-based evidence showing this implies the policy raised welfare. We also document higher grade-point averages and on-time graduation rates resulting from the policy.

The Effect of Stock Ownership on Individual Spending and Loyalty  with Vrinda Mittal and Michaela Pagel.

In this study, we quantify the effects of receiving stocks from certain brands on spending in the brand’s stores. We use data from a new FinTech app, Bumped, that opens a brokerage account for its users and rewards them with stocks when they shop at previously elected stores. For identification, we use the staggered distribution of Bumped accounts over time after individuals sign up for a waitlist. We find that individuals spend 40% more per week at elected brands and stores after being allocated a Bumped account. Additionally, Bumped granted some of the users with stocks from several companies as part of a promotional program. In response to the stock grants, individuals increase their weekly spending by 100% at the granted brands. We also find that users transfer more funds into their other brokerage after their Bumped accounts were opened. Beyond  documenting a causal link between stock ownership and individual spending and investments, we show that weekly spending in certain brands of our users is strongly correlated with stock holdings of that brand by Robinhood brokerage clients.

Publications

Side Effects of Nudging: Evidence from a Randomized Intervention in the Credit Card Market 

The Review of Financial Studies, Volume 34, Issue 5, May 2021, Pages 2580–2607

Supplementary Materials can be found here:

Previously circulated with the title "Selective Attention in Consumer Finance: Evidence from a Randomized Intervention in the Credit Card Market"

This paper studies the direct and indirect effects of nudging, by means of a field experiment with a financial management platform in Brazil. Reminders for upcoming credit card payments reduce credit card late-payment fees by 14%, but increase overdraft fees in checking accounts by 9%. The unintended effect is concentrated on users with a history of overdraft use. These users experienced a net increase of 5% in total fees, while the rest experienced savings of 15%. The results provide clear insights for nudge design: Like any policy action, nudges can have side effects, and one size may not fit all.

The Hidden Role of Contract Terms: The Case of Credit Card Minimum Payments in Mexico. With J. Negrin.  

Management Science. 2022 May; 68(5):3856-77.

This paper argues that thresholds in financial contracts act as implicit nudges in consumers' decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a one percentage point change in minimum payments leads to a 0.87 pp change in actual payments, both expressed as a percentage of total balances. We decompose the total effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The later captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic: the tendency of consumers to pay whole-number multiples of the minimum payment.

Refinancing Inequality During the COVID-19 Pandemic With S. Agarwal, S. Chomsisengphet, H. Kiefer and L. Kiefer

Journal of Financial and Quantitative Analysis (Forthcoming)

During the first half of 2020, the difference in savings from mortgage refinancing between high- and low-income borrowers was ten times higher than before. This was the result of two factors: high-income borrowers increased their refinancing activity more than otherwise comparable low-income borrowers and, conditional on refinancing, they captured slightly larger improvements in interest rates. Refinancing inequality increases with the severity of the COVID-19 pandemic and is characterized by an under-representation of low-income borrowers in the pool of applications. We estimate a difference of \$5 billion in savings between the top income quintile and the rest of the market.

Work in progress

Effect of the choice of payment method on individual Spending. With Michael King, Chuck Howard and Roland Umanan.

What Matters for the Choice of Digital Credit Products . With Michael King and Roland Umanan.

Short notes (Archived)

Learning and Endogenous Limitations of Exploitation in Dynamic Contracts: A brief note.

In this brief note, I consider the problem of a profit maximizing firm facing a time inconsistent and partially naive consumer that learns about her own preferences over time. Under certain conditions on the structure of consumers beliefs, a profit maximizing firm will distort his contract offer forgoing profits today to hamper consumer learning, and ultimately increase the naivete remaining the next period. Compared to the static scenario without learning, the resulting contract is initially less exploitative for consumers, but this feature turns out to be only temporary since in the second period an exploitative contract replaces the full commitment device a monopolist would offer otherwise in the last period. The results are tailored to be interpreted in the context of credit markets based on the setting introduced by Heiduhes and Koszegi (2010).