Credit limits and bankruptcy
Credit cards offer a limit, rather than a specific loan size, at a pre-approved interest rate. This paper studies the determination of these credit limits jointly with default in the presence of one-period debt. I adapt the standard incomplete markets macroeconomic model of one-period unsecured debt with the optimal choice of credit limit. Endogenous limits and positive default coexist. A numerical exercise illustrates the consequences of various factors for indebtedness, credit limits, and bankruptcy.
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