The Effects of Regulating Hidden Add-on Costs
54 Pages Posted: 3 Aug 2012 Last revised: 11 Aug 2013
Date Written: August 9, 2013
We examine the welfare effects of regulation in a model where firms can shroud add-on costs, such as penalty fees for consumer financial products. In isolation, imposing price controls or disclosure mandates on such fees can increase or decrease welfare, even when these regulations have no direct costs. There are, however, strong complementarities between price controls and disclosure mandates: conditional on disclosure being mandated, price controls always (weakly) increase welfare, and conditional on prices being sufficiently constrained, disclosure mandates always (weakly) increase welfare.
Keywords: Disclosure, Shrouding, Regulation, Add-on Pricing, Household Finance
JEL Classification: D60, G28
Suggested Citation: Suggested Citation