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Credit Card Limit Increases as a Natural Experiment for Credit Constraints
Another way to identify credit-constrained individuals through a natural experiment is by observing their behavior following an automatic increase in their credit card's borrowing limit. Evidence from a US study shows that when people's credit limits are raised, allowing them to borrow more, they often choose to do so. This increase in borrowing suggests that their previous spending was restricted by their access to credit.
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CORE Econ
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Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Credit Card Limit Increases as a Natural Experiment for Credit Constraints
A city government decides to boost local economies by offering a one-time subsidy to all restaurants located in a specific district that has historically experienced low foot traffic. An economist compares the revenue of restaurants inside this district to the revenue of restaurants in an adjacent district one year after the subsidy was provided. Why is this research design a potentially flawed application of the natural experiment method to determine the causal effect of the subsidy?
Evaluating a Research Design
Identifying the Components of a Natural Experiment
A government unexpectedly bans the use of a highly efficient, but environmentally damaging, type of fishing net in one of two adjacent coastal regions. Both regions have similar fish populations and market conditions. An economist plans to study the impact of this ban on fishermen's average income by comparing the income in the region with the ban to the income in the region without it. Which of the following statements provides the strongest justification for why this scenario constitutes a valid natural experiment?
An economist observes that after a state unexpectedly passes a law increasing the minimum wage, employment in low-wage sectors falls more in that state compared to a neighboring state with no change in its minimum wage law. The economist concludes that the minimum wage increase caused the job losses. Which of the following, if true, would most seriously weaken the economist's conclusion drawn from this natural experiment?
Analyze the following research scenarios. Match each scenario with the statement that best describes its validity as a natural experiment for isolating a specific causal effect.
An economist wants to measure the causal impact of improved public transportation on local property values. They identify a neighborhood where a new subway station was recently built and compare the change in property values in that neighborhood over five years to the change in a similar neighborhood that did not receive a new station. The economist claims this setup constitutes a valid natural experiment. Which of the following statements identifies the most critical flaw in this research design?
An economist wants to isolate the causal effect of an increase in family size on household savings. Which of the following scenarios provides the most valid natural experiment to study this effect?
Designing a Natural Experiment for Policy Analysis
A large corporation introduces a voluntary, company-funded financial wellness program. To measure its effectiveness, an economist compares the average savings rate of employees who chose to participate in the program with the average savings rate of those who did not. This research design is a valid example of a natural experiment.
Learn After
Study by Gross and Souleles (2002) on Liquidity Constraints and Consumer Behavior
Interpreting Consumer Borrowing Behavior
An economist observes that after a bank automatically and unexpectedly raises the credit limits for a large group of its cardholders, the average monthly balance carried by these individuals increases significantly. Based on this evidence, what is the most logical inference about this group of cardholders before their credit limits were raised?
Evaluating an Economic Conclusion
Critique of a Credit Constraint Study
Critique of a Credit Constraint Study
A financial institution unexpectedly and automatically raises the credit limits for a large, random sample of its customers. A subsequent review finds that a significant portion of these customers increased their outstanding debt shortly after the limit change. Based on this observation alone, it is logical to conclude that these specific customers' previous spending levels were restricted by their access to credit.
A bank is conducting a study to identify which of its customers are 'credit-constrained,' meaning their spending is limited by their access to credit rather than their desire to spend. They automatically increase the credit limits for four different groups of customers. Which of the following scenarios provides the most reliable evidence that the affected group was credit-constrained before the limit increase?
A research study observes that when a credit card company automatically increases the borrowing limits for a random group of its clients, the average debt held by these clients rises. The researchers conclude that these clients were previously 'credit-constrained,' meaning their spending was limited by their access to credit. Which of the following discoveries, if true, would most seriously undermine the validity of this conclusion?
An economist wants to test the hypothesis that a portion of the population is 'credit-constrained,' meaning their spending is directly limited by their ability to borrow. The economist plans to study consumer behavior after a credit card limit increase. Which of the following study designs would provide the least reliable evidence to identify individuals who were previously credit-constrained?
A research team is studying consumer spending by analyzing data from a bank that automatically raised the credit limits for a random selection of its customers. The team compares the borrowing patterns of these customers to a similar group whose limits were not changed. Match each element of this study to its correct role in the experimental design.