Default Option, Risk-Aversion and Household Borrowing Behaviour
AbstractAssuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable.
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Bibliographic InfoPaper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 200705.
Length: 22 pages
Date of creation: Sep 2007
Date of revision:
Consumption; exponential utility; certainty equivalent; households; default option; borrowing; risk; risk aversion; risk management;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D14 - Microeconomics - - Household Behavior - - - Personal Finance
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-06 (All new papers)
- NEP-BAN-2007-10-06 (Banking)
- NEP-UPT-2007-10-06 (Utility Models & Prospect Theory)
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