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Credit Markets with time-inconsistent agents and strategic loan default

Author

Listed:
  • Joydeep Bhattacharya

    (Iowa State University)

  • Monisankar Bishnu

    (Indian Statistical Institute, Delhi)

  • Min Wang

    (Peking University, Bejing)

Abstract

We study credit contracts under a lifecycle setting where time-inconsistent agents lack the internal commitment to stick to consumption plans and external commit- ment to repaying loans. With unrestricted credit, agents with only internal com- mitment problems may overborrow. If, additionally, they face external commitment problems, lenders endogenously impose borrowing limits similar to the ability-to- repay rules consumer financial protection agencies impose. Even with restricted credit access, except in exceptional cases, agents suffering from the twin commit- ment problems can achieve, at most, fully-sophisticated allocations. The govern- ment can achieve the first-best allocations if and only if it is assisted with endoge- nously imposed borrowing limits.

Suggested Citation

  • Joydeep Bhattacharya & Monisankar Bishnu & Min Wang, 2023. "Credit Markets with time-inconsistent agents and strategic loan default," Discussion Papers 23-01, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:23-01
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    File URL: https://www.isid.ac.in/~epu/dispapers/dp23_01.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    endogenous borrowing constraints; CFPB; ability-to-pay rule; overbor- rowing; financial protection;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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