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A Quantitative Theory of Information and Unsecured Credit

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  • Kartik Athreya

    (Federal Reserve Bank of Richmond)

Abstract

Over the past three decades four striking features of aggregates in the unsecured credit market have been documented: (1) rising availability of credit along both the intensive and extensive margins, (2) rising debt accumulation, (3) rising bankruptcy rates and discharge in bankruptcy, and (4) rising dispersion in interest rates across households. We provide a quantitative model of unsecured credit to interpret these facts; a novel contribution is that we allow for asymmetric information with individualized loan pricing. Our main finding is that all four outcomes mentioned above are consistent with the hypothesis that lenders observe more components of individual income now than in earlier periods. In addition, the paper makes a methodological contribution: an algorithm to locate equilibria with individualized pricing under asymmetric information, a task that is complicated by the requirement that off-equilibrium beliefs and prices are essential for equilibrium outcomes.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 68.

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Date of creation: 2008
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Handle: RePEc:red:sed008:68

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  25. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
  26. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.
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