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.
Medina, Paolina C and Negrin, José Luis, The Hidden Role of Contract Terms: Evidence from Credit Card Minimum Payments in Mexico (February 11, 2021). Management Science.