The Effects of Regulating Hidden Add-on Costs

54 Pages Posted: 3 Aug 2012 Last revised: 11 Aug 2013

Date Written: August 9, 2013

Abstract

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

Ko, Kwangmin and Williams, Jared, The Effects of Regulating Hidden Add-on Costs (August 9, 2013). Available at SSRN: https://ssrn.com/abstract=2122793 or http://dx.doi.org/10.2139/ssrn.2122793

Kwangmin Ko

Upstart ( email )

2950 S Delaware St #300
San Mateo, CA 94403
United States
2022570741 (Phone)

Jared Williams (Contact Author)

University of South Florida ( email )

Tampa, FL 33620
United States

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