Credit Cards and the Reverse Robin Hood Fallacy: Do Credit Card Rewards Really Steal from the Poor and Give to the Rich?

Banking and Financial Services Policy Review, Forthcoming

George Mason Law & Economics Research Paper No. 21-41

28 Pages Posted: 15 Dec 2021

See all articles by Todd J. Zywicki

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Ben Sperry

International Center for Law & Economics (ICLE)

Julian Morris

International Center for Law and Economics; Reason Foundation; IEA, Institute of Economic Affairs, U.K.

Date Written: December 10, 2021

Abstract

This paper considers the evidence for and against the reverse Robin Hood hypothesis. Under the “reverse Robin Hood” hypothesis, credit-card companies rob from the poor users of cash and give to the rich users of credit cards. But there are problems with this story. Indeed, the reverse Robin Hood may be more mythical than the original Robin Hood.

Part I describes a strong form of the reverse Robin Hood hypothesis in more detail. Part II subjects this strong form of the reverse Robin Hood hypothesis to economic scrutiny.

First, the economics of multisided markets is introduced to provide a basic framework to understand the operation of credit-card networks and the roles played by interchange fees and rewards programs. Second, the logic of the reverse Robin Hood hypothesis is analyzed in light of those economic principles, as well as the system’s empirical realities. Implicit to the conjectures that make up the reverse Robin Hood hypothesis are a number of propositions that must be true for the hypothesis to be upheld. Two main observations falsify the hypothesis. First, merchants are not able to pass on all costs to consumers. Second, the availability of rewards cards is more tied to credit ratings than to income, which means that even those with lower incomes do benefit from the use of rewards cards. Part III considers and rejects a weaker form of the reverse Robin Hood hypothesis from a 2020 Boston Fed Study.

Finally, the brief considers the likely distributional effects of proposed legislative or regulatory action to target credit-card interchange fees. Specifically, Part IV considers the evidence related to merchant pass-through of interchange-fee caps in the form of lower prices for consumers, as well as the likely ways banks and other card issuers would adapt to any such fee caps. If the experience with caps on debit card fees under the Durbin Amendment is any indication, the benefits of interchange-fee caps will be much smaller than the costs to consumers, especially lower-income consumers.

Keywords: credit card, reward program, credit card fees, wealth transfer, reverse Robin Hood

JEL Classification: D1, D10, D18, K2, K20, K23

Suggested Citation

Zywicki, Todd J. and Sperry, Raymond and Morris, Julian, Credit Cards and the Reverse Robin Hood Fallacy: Do Credit Card Rewards Really Steal from the Poor and Give to the Rich? (December 10, 2021). Banking and Financial Services Policy Review, Forthcoming, George Mason Law & Economics Research Paper No. 21-41, Available at SSRN: https://ssrn.com/abstract=3984298

Todd J. Zywicki (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Raymond Sperry

International Center for Law & Economics (ICLE) ( email )

110 Maryland Ave, NE
Suite 407
Washington, DC District of Columbia 20002
United States
8147245659 (Phone)
8147245659 (Fax)

Julian Morris

International Center for Law and Economics ( email )

2117 NE Oregon St. Ste 501
Portland, OR 97232
United States

HOME PAGE: http://https://laweconcenter.org/author/julianmorriss/

Reason Foundation ( email )

United States

HOME PAGE: http://www.reason.org

IEA, Institute of Economic Affairs, U.K.

2 Lord North Street
London SW1P 3LB
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
51
Abstract Views
232
rank
507,957
PlumX Metrics