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Default Option, Risk-Aversion and Household Borrowing Behaviour

  • Ingrid Groessl

    ()

    (Department for Economics and Politics, University of Hamburg)

  • Ulrich Fritsche

    ()

    (Department for Economics and Politics, University of Hamburg, and DIW Berlin)

Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_5_2007.pdf
File Function: First version, 2007
Download Restriction: no

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 200705.

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Length: 22 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:hep:macppr:200705
Contact details of provider: Web page: http://www.wiso.uni-hamburg.de/dwp

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