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Default Option, Risk-Aversion and Household Borrowing Behaviour

Author

Listed:
  • Ingrid Groessl

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

  • Ulrich Fritsche

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

Abstract

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.

Suggested Citation

  • Ingrid Groessl & Ulrich Fritsche, 2007. "Default Option, Risk-Aversion and Household Borrowing Behaviour," Macroeconomics and Finance Series 200705, Hamburg University, Department Wirtschaft und Politik.
  • Handle: RePEc:hep:macppr:200705
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    File URL: https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_5_2007.pdf
    File Function: First version, 2007
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    More about this item

    Keywords

    Consumption; exponential utility; certainty equivalent; households; default option; borrowing; risk; risk aversion; risk management;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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