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Loan guarantees for consumer credit markets

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

Loan guarantees are arguably the most widely used policy intervention in credit markets, especially for consumers. This may be natural, as they have several features that, a priori, suggest that they might be particularly effective in improving allocations. However, despite this, little is actually known about the size of their effects on prices, allocations, and welfare. ; In this paper, we provide a quantitative assessment of loan guarantees, in the context of unsecured consumption loans. Our work is novel as it studies loan guarantees in a rich dynamic model where credit allocation is allowed to be affected by both limited commitment frictions and private information. ; Our findings suggest that consumer loan guarantees may be a powerful tool to alter allocations that, if carefully arranged, can improve welfare, sometimes significantly. Specifically, our key findings are that (i) under both symmetric and asymmetric information, guaranteeing small consumer loans nontrivially alters allocations, and strikingly, yields welfare improvements even after a key form of uncertainty—one's human capital level—has been realized, (ii) larger guarantees change allocations very significantly, but lower welfare, sometimes for all household-types, and (iii) substantial further gains are available when guarantees are restricted to households hit by large expenditure shocks.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-06.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-06
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  1. David Andolfatto, 2000. "A Theory of Inalienable Property Rights," Cahiers de recherche CREFE / CREFE Working Papers 110, CREFE, Université du Québec à Montréal.
  2. William R. Zame, 1990. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 585, UCLA Department of Economics.
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  4. 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.
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  9. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2011. "A quantitative theory of information and unsecured credit," Working Paper 08-06, Federal Reserve Bank of Richmond.
  10. Kartik Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
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  12. Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  13. Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond.
  14. William G. Gale, 1988. "Economic Effects of Federal Credit Programs," UCLA Economics Working Papers 483, UCLA Department of Economics.
  15. Ian V�¡squez, 2002. "A Retrospective on the Mexican Bailout," Cato Journal, Cato Journal, Cato Institute, vol. 21(3), Winter.
  16. William G. Gale, 1988. "Federal Lending and the Market for Credit," UCLA Economics Working Papers 504, UCLA Department of Economics.
  17. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
  18. Jia Ye (George), 2013. "Small business loan guarantees as insurance against aggregate risks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 25, August.
  19. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
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