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Credit Lines

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  • Xavier Mateos-Planas

    (Queen Mary Uiversity of London)

Abstract

This 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.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1293.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1293

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  1. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  2. Satyajit Chatterjee & Dean Corbae, 2004. "A Competitive Theory of Credit Scoring," 2004 Meeting Papers, Society for Economic Dynamics 823, Society for Economic Dynamics.
  3. Athreya, Kartik B. & Simpson, Nicole B., 2006. "Unsecured debt with public insurance: From bad to worse," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(4), pages 797-825, May.
  4. 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.
  5. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 2(2), pages 165-93, April.
  6. 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.
  7. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 0910, Economics Division, School of Social Sciences, University of Southampton.
  8. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  9. 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.
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  1. Game Thoery and Macroeconomics
    by paragwaknis in Musings of the Sorts on 2012-07-16 18:42:41
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Cited by:
  1. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(1), pages 83-103, January.
  2. Xavier Mateos-Planas, 2011. "Consumer default with complete markets," 2011 Meeting Papers, Society for Economic Dynamics 954, Society for Economic Dynamics.
  3. Leonardo Martinez & Juan Carlos Hatchondo, 2009. "A model of credit risk without commitment," 2009 Meeting Papers, Society for Economic Dynamics 978, Society for Economic Dynamics.
  4. N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.
  5. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers, Society for Economic Dynamics 144, Society for Economic Dynamics.

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