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A finite-life private-information theory of unsecured consumer debt

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  • Satyajit Chatterjee
  • Dean Corbae
  • José-Víctor Ríos-Rull

Abstract

The 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 Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-14.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-14

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Cited by:
  1. Daniel R. Sanches, 2010. "A dynamic model of unsecured credit," Working Papers 11-2, Federal Reserve Bank of Philadelphia.
  2. Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond.
  3. Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers 685, Society for Economic Dynamics.
  4. Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
  5. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
  6. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
  7. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
  8. Felicia Ionescu, 2011. "The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default," 2011 Meeting Papers 912, Society for Economic Dynamics.
  9. 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.
  10. Chen, Daphne & Corbae, Dean, 2011. "On the welfare implications of restricting bankruptcy information," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 4-13, March.

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