A finite-life private-information theory of unsecured consumer debt
AbstractWe present a theory of unsecured consumer debt that does not rely on utility costs of default or on enforcement mechanisms that arise in repeated-interaction settings. The theory is based on private information about a person's type and on a person's incentive to signal his type to entities other than creditors. Specifically, debtors signal their low-risk status to insurers by avoiding default in credit markets. The signal is credible because in equilibrium people who repay are more likely to be the low-risk type and so receive better insurance terms. We explore two different mechanisms through which repayment behavior in the credit market can be positively correlated with low-risk status in the insurance market. Our theory is motivated in part by some facts regarding the role of credit scores in consumer credit and auto insurance markets.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 142 (2008)
Issue (Month): 1 (September)
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Web page: http://www.elsevier.com/locate/inca/622869
Other versions of this item:
- Satyajit Chatterjee & Dean Corbae & José-Víctor Ríos-Rull, 2007. "A finite-life private-information theory of unsecured consumer debt," Working Papers 07-14, Federal Reserve Bank of Philadelphia.
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- Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond.
- Felicia Ionescu, 2011. "The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default," 2011 Meeting Papers 912, Society for Economic Dynamics.
- Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
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- Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers 685, Society for Economic Dynamics.
- Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
- Felicia Ionescu & Marius Ionescu, 2012. "The Interplay Between Student Loans and Credit Cards: Implications for Default," Working Papers 2012-014, Human Capital and Economic Opportunity Working Group.
- Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
- Chen, Daphne & Corbae, Dean, 2011. "On the welfare implications of restricting bankruptcy information," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 4-13, March.
- Daniel R. Sanches, 2010. "A dynamic model of unsecured credit," Working Papers 11-2, Federal Reserve Bank of Philadelphia.
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