IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_8105.html
   My bibliography  Save this paper

Consumer Debt and Default: A Macro Perspective

Author

Listed:
  • Florian Exler
  • Michèle Tertilt

Abstract

In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers. In the second part of the survey, we describe what has by now become the workhorse model of consumer credit and default. We discuss a quantitative version of the model and use it to decompose the main reasons for default. We also use the model to illustrate how the details of default costs matter. The remainder of the survey then discusses the literature centered around two questions. First, what are the welfare implications of various bankruptcy laws? And second, what caused the rise in filings over time? We end with a discussion of open questions and fruitful avenues for future research.

Suggested Citation

  • Florian Exler & Michèle Tertilt, 2020. "Consumer Debt and Default: A Macro Perspective," CESifo Working Paper Series 8105, CESifo.
  • Handle: RePEc:ces:ceswps:_8105
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8105.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Will Dobbie & Jae Song, 2015. "Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection," American Economic Review, American Economic Association, vol. 105(3), pages 1272-1311, March.
    2. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    3. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2605-2642.
    4. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-417, May.
    5. Scott R. Baker, 2018. "Debt and the Response to Household Income Shocks: Validation and Application of Linked Financial Account Data," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1504-1557.
    6. Leonardo Bursztyn & Stefano Fiorin & Daniel Gottlieb & Martin Kanz, 2019. "Moral Incentives in Credit Card Debt Repayment: Evidence from a Field Experiment," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1641-1683.
    7. Will Dobbie & Paul Goldsmith‐Pinkham & Neale Mahoney & Jae Song, 2020. "Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports," Journal of Finance, American Finance Association, vol. 75(5), pages 2377-2419, October.
    8. Arna Olafsson & Michaela Pagel, 2018. "The Liquid Hand-to-Mouth: Evidence from Personal Finance Management Software," The Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4398-4446.
    9. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    10. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    11. Dean Corbae & Andrew Glover, 2018. "Employer Credit Checks: Poverty Traps versus Matching Efficiency," NBER Working Papers 25005, National Bureau of Economic Research, Inc.
    12. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    13. Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
    14. Akyol, Ahmet & Athreya, Kartik, 2011. "Credit and self-employment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 363-385, March.
    15. Lukasz A. Drozd & Ricardo Serrano-Padial, 2017. "Modeling the Revolving Revolution: The Debt Collection Channel," American Economic Review, American Economic Association, vol. 107(3), pages 897-930, March.
    16. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-1164, December.
    17. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    18. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
    19. Daphne Chen & Jake Zhao, 2017. "The Impact of Personal Bankruptcy on Labor Supply Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 40-61, October.
    20. Albanesi, Stefania & Nosal, Jaromir, 2015. "Insolvency After the 2005 Bankruptcy Reform," CEPR Discussion Papers 10533, C.E.P.R. Discussion Papers.
    21. Manolis Galenianos & Alessandro Gavazza, 2022. "Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1897-1932.
    22. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
    23. Adrien Auclert & Kurt Mitman, 2018. "Bankruptcy and Aggregate Demand," 2018 Meeting Papers 1085, Society for Economic Dynamics.
    24. Ronel Elul & Piero Gottardi, 2015. "Bankruptcy: Is It Enough to Forgive or Must We Also Forget?," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 294-338, November.
    25. Mankart, Jochen & Rodano, Giacomo, 2015. "Personal bankruptcy law, debt portfolios, and entrepreneurship," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 157-172.
    26. Mateos-Planas, Xavier & Seccia, Giulio, 2006. "Welfare implications of endogenous credit limits with bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2081-2115, November.
    27. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," 2018 Meeting Papers 112, Society for Economic Dynamics.
    28. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.
    29. James MacGee, 2012. "The Rise in Consumer Credit and Bankruptcy: Cause for Concern?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 346, April.
    30. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
    31. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1148-1177.
    32. John Gathergood & Neale Mahoney & Neil Stewart & Jörg Weber, 2019. "How Do Individuals Repay Their Debt? The Balance-Matching Heuristic," American Economic Review, American Economic Association, vol. 109(3), pages 844-875, March.
    33. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2019. "The Economic Consequences of Bankruptcy Reform," NBER Working Papers 26254, National Bureau of Economic Research, Inc.
    34. Domowitz, Ian & Eovaldi, Thomas L, 1993. "The Impact of the Bankruptcy Reform Act of 1978 on Consumer Bankruptcy," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 803-835, October.
    35. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
    36. Olga Gorbachev & María José Luengo-Prado, 2019. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 294-309, May.
    37. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2014. "Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 431-443, July.
    38. Carol C. Bertaut & Michael Haliassos & Michael Reiter, 2009. "Credit Card Debt Puzzles and Debt Revolvers for Self Control," Review of Finance, European Finance Association, vol. 13(4), pages 657-692.
    39. Jonathan Zinman, 2009. "Where Is The Missing Credit Card Debt? Clues And Implications," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(2), pages 249-265, June.
    40. Boyes, William J & Faith, Roger L, 1986. "Some Effects of the Bankruptcy Reform Act of 1978," Journal of Law and Economics, University of Chicago Press, vol. 29(1), pages 139-149, April.
    41. Victor Stango & Jonathan Zinman, 2016. "Borrowing High versus Borrowing Higher: Price Dispersion and Shopping Behavior in the U.S. Credit Card Market," The Review of Financial Studies, Society for Financial Studies, vol. 29(4), pages 979-1006.
    42. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    43. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    44. Chen, Daphne & Corbae, Dean, 2011. "On the welfare implications of restricting bankruptcy information," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 4-13, March.
    45. Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 595-609.
    46. Shepard, Lawrence, 1984. "Personal Failures and the Bankruptcy Reform Act of 1978," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 419-437, October.
    47. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pattison, Nathaniel & Millimet, Daniel L., 2023. "A Tale of Two Bankruptcies: Geographic Differences in Bankruptcy Chapter Choice," IZA Discussion Papers 16105, Institute of Labor Economics (IZA).
    2. Satyajit Chatterjee & Dean Corbae & Kyle Dempsey & José‐Víctor Ríos‐Rull, 2023. "A Quantitative Theory of the Credit Score," Econometrica, Econometric Society, vol. 91(5), pages 1803-1840, September.
    3. Exler, Florian & Hansak, Alexander, 2021. "Naïve Consumers and Financial Mistakes," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242359, Verein für Socialpolitik / German Economic Association.
    4. Tertilt, Michèle & Exler, Florian & Livshits, Igor & MacGee, Jim, 2020. "Consumer Credit with Over-Optimistic Borrowers," CEPR Discussion Papers 15570, C.E.P.R. Discussion Papers.
    5. Koşar, Gizem & Melcangi, Davide & Pilossoph, Laura & Wiczer, David, 2023. "Stimulus through Insurance: The Marginal Propensity to Repay Debt," IZA Discussion Papers 16211, Institute of Labor Economics (IZA).
    6. Li, Tsung-Hsien, 2022. "Credit card and payday loan borrowing: Evidence in the SCF 2010–2019," Economics Letters, Elsevier, vol. 221(C).
    7. Aidt, Toke & Asatryan, Zareh & Badalyan, Lusine, 2022. "Political consequences of consumer debt relief," ZEW Discussion Papers 22-049, ZEW - Leibniz Centre for European Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    2. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    3. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    4. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    5. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    6. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    7. Hülya Eraslan & Gizem Koşar & Wenli Li & Pierre‐Daniel Sarte, 2017. "An Anatomy Of U.S. Personal Bankruptcy Under Chapter 13," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 671-702, August.
    8. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-193, April.
    9. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    10. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    11. Kurt Mitman, 2016. "Macroeconomic Effects of Bankruptcy and Foreclosure Policies," American Economic Review, American Economic Association, vol. 106(8), pages 2219-2255, August.
    12. Brian Jonghwan Lee, 2024. "Bankruptcy Lawyers and Credit Recovery," Working Papers 24-10, Federal Reserve Bank of Philadelphia.
    13. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2020. "The Economic Consequences of Bankruptcy Reform," Working Papers 2020-164, Becker Friedman Institute for Research In Economics.
    14. Scott L. Fulford & Scott Schuh, 2023. "Revolving versus Convenience Use of Credit Cards: Evidence from U.S. Credit Bureau Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1667-1701, October.
    15. Mankart, Jochen, 2014. "The (Un-) importance of Chapter 7 wealth exemption levels," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 1-16.
    16. Pavan, Marina, 2008. "Consumer durables and risky borrowing: The effects of bankruptcy protection," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1441-1456, November.
    17. Olafsson, Arna & Gathergood, John, 2020. "The Co-holding Puzzle: New Evidence from Transaction-Level Data," CEPR Discussion Papers 14799, C.E.P.R. Discussion Papers.
    18. Corradin, S. & Gropp, R. & Huizinga, H.P. & Laeven, L., 2010. "Who Invests in Home Equity to Exempt Wealth from Bankruptcy?," Other publications TiSEM 876e53a4-bd96-4516-8f9f-1, Tilburg University, School of Economics and Management.
    19. Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
    20. Andolfatto, David & Gervais, Martin, 2008. "Endogenous debt constraints in a life-cycle model with an application to social security," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3745-3759, December.

    More about this item

    Keywords

    consumer debt; bankruptcy; Chapter 7; default; credit cards; charge-offs;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_8105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.