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More punishment, less default?


  • Erwan Quintin



The extent of lender recourse following contractual default varies greatly across economies. Intuitively, one would expect these differences to matter for default behavior at the micro-economic level and for equilibrium quantities. The objective of this paper is to study an equilibrium model in the spirit of Dubey et al. (Econometrica 73(1):1–37, 2005 ) where the implications of recourse for default patterns can be characterized. Under plausible conditions, broader recourse causes yields at origination and default rates to fall for a given set of observable borrower characteristics. On the other hand, the effect of broader recourse on average default rates and the quantity of loans issued is deeply ambiguous because the composition of the pool of borrowers can change. Raising the fraction of assets subject to recourse can well increase equilibrium default rates. I discuss the implications of these results for how one should test empirically whether recourse statutes matter for loss severity rates and the frequency of default in secured loan markets. Copyright Springer-Verlag 2012

Suggested Citation

  • Erwan Quintin, 2012. "More punishment, less default?," Annals of Finance, Springer, vol. 8(4), pages 427-454, November.
  • Handle: RePEc:kap:annfin:v:8:y:2012:i:4:p:427-454 DOI: 10.1007/s10436-012-0203-4

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    References listed on IDEAS

    1. Don Schlagenhauf & Carlos Garriga, 2009. "The Design of Foreclosure Punishments: You Just Cannot Walk Away!," 2009 Meeting Papers 396, Society for Economic Dynamics.
    2. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    3. Ambrose, Brent W & Capone, Charles A, Jr & Deng, Yongheng, 2001. "Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure," The Journal of Real Estate Finance and Economics, Springer, vol. 23(2), pages 213-234, September.
    4. Andra C. Ghent & Marianna Kudlyak, 2010. "Recourse and residential mortgage default: theory and evidence from U.S. states," Working Paper 09-10, Federal Reserve Bank of Richmond.
    5. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    6. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
    7. Burcu Duygan-Bump & Charles Grant, 2009. "Household debt repayment behaviour: what role do institutions play?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 107-140, January.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    9. Terrence M. Clauretie, 1987. "The Impact of Interstate Foreclosure Cost Differences and the Value of Mortgages on Default Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(3), pages 152-167.
    10. Jones, Lawrence D, 1993. "Deficiency Judgments and the Exercise of the Default Option in Home Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 115-138, April.
    11. Chatterjee, Satyajit & Eyigungor, Burcu, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
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    Cited by:

    1. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Hatchondo, Juan Carlos & Martinez, Leonardo & Sánchez, Juan M., 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis, revised 31 Jul 2015.
      • Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," Caepr Working Papers 2015-011 Classification-D, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
    2. Quintin, Erwan, 2013. "On existence in equilibrium models with endogenous default," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 418-421.
    3. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 153-180, September.

    More about this item


    Recourse; Default; General equilibrium; D52; E44; G12;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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