AbstractThis paper develops a new theory of long term unsecured credit contracts based on costly contracting that matches the data in a variety of dimensions. Credit lines are long term relations between lending firms and households that pre-specify a credit limit and interest rate in each period. Households can unilaterally default in as in the U.S. Bankruptcy code, and can unilaterally switch credit lines. Lending firms can set a new credit limit at any time, but must commit to the interest rate or not depending on the regulatory setting. We solve and characterize the equilibria, finding the resulting set of contracts as well as the distribution of households over interest rates, credit limits and wealth. We find that this model replicates the main properties of typical lending contracts. We use the theory to study the new regulatory rules in the U.S. credit card market which require a stronger commitment from lending firms not to raise interest rates discretionally. This results in tighter limits but lower interest rates, reduced indebtedness and lower default. Typically, but not for all households, the new policy improves welfare.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1293.
Date of creation: 2011
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Athreya, Kartik B. & Simpson, Nicole B., 2006.
"Unsecured debt with public insurance: From bad to worse,"
Journal of Monetary Economics,
Elsevier, vol. 53(4), pages 797-825, May.
- Kartik Athreya & Nicole B. Simpson, 2004. "Unsecured debt with public insurance : from bad to worse," Working Paper 03-14, Federal Reserve Bank of Richmond.
- James S. Costain & Michael Reiter, 2003.
"Business cycles, unemployment insurance and the calibration of matching models,"
Economics Working Papers
872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
- Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
- James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
- James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series 1008, CESifo Group Munich.
- Josep Pijoan-Mas 2 & Antonia Díaz & José-Víctor Ríos-Rull, 2001.
"Habit Formation: Inplications For The Wealth Distribution,"
Economics Working Papers
we015114, Universidad Carlos III, Departamento de Economía.
- Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
- Igor Livshits & James MacGee & Michèle Tertilt, 2007.
"Accounting for the Rise in Consumer Bankruptcies,"
NBER Working Papers
13363, National Bureau of Economic Research, Inc.
- Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," University of Western Ontario, Economic Policy Research Institute Working Papers 20066, University of Western Ontario, Economic Policy Research Institute.
- Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
- Timothy J. Kehoe & David K. Levine, 1992.
"Debt constrained asset markets,"
445, Federal Reserve Bank of Minneapolis.
- Satyajit Chatterjee & Dean Corbae, 2004. "A Competitive Theory of Credit Scoring," 2004 Meeting Papers 823, Society for Economic Dynamics.
- Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 0910, Economics Division, School of Social Sciences, University of Southampton.
- Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007.
"A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,"
Econometric Society, vol. 75(6), pages 1525-1589, November.
- Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de AltiÂsimos Estudios RiÂos PeÂ©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
- Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 07-16, Federal Reserve Bank of Philadelphia.
- Makoto Nakajima, 2012.
"Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.
- Makoto Nakajima, 2010. "Business cycles in the equilibrium model of labor market search and self-insurance," Working Papers 10-24, Federal Reserve Bank of Philadelphia.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
- Xavier Mateos-Planas, 2011. "Consumer default with complete markets," 2011 Meeting Papers 954, Society for Economic Dynamics.
- 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.
- Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
- N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.
- Leonardo Martinez & Juan Carlos Hatchondo, 2009.
"A model of credit risk without commitment,"
2009 Meeting Papers
978, Society for Economic Dynamics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.