A finite-life private-information theory of unsecured consumer debt
AbstractThe authors 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. The authors explore two different mechanisms through which repayment behavior in the credit market can be positively correlated with low-risk status in the insurance market. Their 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 InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-14.
Date of creation: 2007
Date of revision:
Other versions of this item:
- Chatterjee, Satyajit & Corbae, Dean & Ríos-Rull, José-Víctor, 2008. "A finite-life private-information theory of unsecured consumer debt," Journal of Economic Theory, Elsevier, Elsevier, vol. 142(1), pages 149-177, September.
- NEP-ALL-2007-06-11 (All new papers)
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- Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper, Federal Reserve Bank of Richmond 09-04, Federal Reserve Bank of Richmond.
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