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More punishment, less default?

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  • Erwan Quintin

Abstract

The extent of lender recourse following contractual default varies greatly across economies. Intuitively, one would expect these differences to matter for default behavior at the micro-economic level and for equilibrium quantities. The objective of this paper is to study an equilibrium model in the spirit of Dubey et al. (Econometrica 73(1):1–37, 2005 ) where the implications of recourse for default patterns can be characterized. Under plausible conditions, broader recourse causes yields at origination and default rates to fall for a given set of observable borrower characteristics. On the other hand, the effect of broader recourse on average default rates and the quantity of loans issued is deeply ambiguous because the composition of the pool of borrowers can change. Raising the fraction of assets subject to recourse can well increase equilibrium default rates. I discuss the implications of these results for how one should test empirically whether recourse statutes matter for loss severity rates and the frequency of default in secured loan markets. Copyright Springer-Verlag 2012

Suggested Citation

  • Erwan Quintin, 2012. "More punishment, less default?," Annals of Finance, Springer, vol. 8(4), pages 427-454, November.
  • Handle: RePEc:kap:annfin:v:8:y:2012:i:4:p:427-454
    DOI: 10.1007/s10436-012-0203-4
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    Cited by:

    1. Cyril Monnet & Erwan Quintin, 2018. "Optimal Exclusion," Diskussionsschriften dp1814, Universitaet Bern, Departement Volkswirtschaft.
    2. Reed, Robert R. & LaRue, Amanda & Ume, Ejindu S., 2018. "Mortgage recourse provisions and housing prices," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 99-111.
    3. Dean Corbae & Erwan Quintin, 2015. "Leverage and the Foreclosure Crisis," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 1-65.
    4. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    5. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 153-180, September.
    6. Quintin, Erwan, 2013. "On existence in equilibrium models with endogenous default," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 418-421.
    7. Yifei Wu & Jeffrey H Dorfman, 2018. "Reducing residential mortgage default: Should policy act before or after home purchases?," PLOS ONE, Public Library of Science, vol. 13(7), pages 1-23, July.

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    More about this item

    Keywords

    Recourse; Default; General equilibrium; D52; E44; G12;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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