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A quantitative theory of information and unsecured credit

  • Kartik Athreya
  • Xuan S. Tam
  • Eric R. Young

Over the past three decades five striking features of aggregates in the unsecured credit market have been documented: (1) rising availability of credit along both the intensive and extensive margins, (2) rising debt accumulation, (3) rising bankruptcy rates and discharge in bankruptcy, (4) rising dispersion in interest rates across households, and (5) the emergence of a discount for borrowers with good credit ratings. We show that all five outcomes are quantitatively consistent with improvements in the ability of lenders to observe borrower characteristics. Part of our contribution is the development of an algorithm for computing equilibria with asymmetric information and individualized pricing. From a welfare perspective, our main finding is that more information is better ex ante, even though better information can rule out pooling outcomes that some groups might find beneficial ex-post.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 08-06.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:08-06
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