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The IT revolution and the unsecured credit market

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  • Juan M. Sánchez

Abstract

Consumer bankruptcies rose sharply over the last 20 years in the U.S. economy. During the same period, there was impressive technological progress in the information sector (the IT revolution). At the same time, pricing of unsecured debt changed dramatically. The dispersion of interest rates rose substantially. More importantly, interest rates varied systematically with the borrowers' characteristics in 2004 but not in 1983. This suggests that changes in the information that lenders use to price debt may be behind changes in the unsecured credit market. A model of unsecured borrowing with asymmetric information is developed to analyze this hypothesis. The effect of changes in the cost of information on borrowing and bankruptcy is explained with the help of a two-period version of the model. A calibrated model is used to study the implications of the IT revolution further. Quantitative exercises show that information costs have a significant effect on the bankruptcy rate. Additionally, a drop in information costs generates other changes (e.g. the projection of the borrowers' characteristics on interest rates) similar to what has occurred over the last 20 years.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-022.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-022

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Keywords: Information technology ; Consumer credit;

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Cited by:
  1. Igor Livshits & James MacGee & Michèle Tertilt, 2011. "Costly Contracts and Consumer Credit," University of Western Ontario, Economic Policy Research Institute Working Papers 20111, University of Western Ontario, Economic Policy Research Institute.
  2. Borghan Nezami Narajabad, 2012. "Information Technology and the Rise of Household Bankruptcy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 526-550, October.
  3. Lukasz A. Drozd & Ricardo Serrano-Padial, 2013. "Modeling the credit card revolution: the role of debt collection and informal bankruptcy," Working Papers 13-12, Federal Reserve Bank of Philadelphia.

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