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Income Contingent Loans as a Risk Management Device

In: Income Contingent Loans

Author

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  • John Quiggin

    (University of Queensland)

Abstract

This chapter presents a simple model of income contingent loans. It is shown that, under plausible conditions, income contingent loans are superior to (i) market loans under asymmetric information, and to (ii) tax-funded provision. In particular, if individuals expect to repay the loan in full, then reducing labor participation does not remove the obligation to repay, and each additional unit of income earned allows an additional dollar of consumption in the period in which the loan is repaid. Hence, even though an income contingent loan is implemented as an increase in the marginal tax rate during the repayment period, it will, in these circumstances, have no distorting effects on labor supply. Adverse effects on labor market efficiency only arise for wages in the interval where the optimal effort given the repayment schedule would lead to partial, but not complete, repayment.

Suggested Citation

  • John Quiggin, 2014. "Income Contingent Loans as a Risk Management Device," International Economic Association Series, in: Bruce Chapman & Timothy Higgins & Joseph E. Stiglitz (ed.), Income Contingent Loans, chapter 3, pages 39-48, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-137-41320-8_4
    DOI: 10.1057/9781137413208_4
    as

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