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Finite-Life, Private-Information Theory of Unsecured Debt

Author Info

  • Satyajit Chatterjee

    ()

    (Research Federal Reserve Bank of Philadelphia)

  • Dean Corbae
  • Jose-Victor Rios-Rull

Abstract

We propose a theory of unsecured debt that is based on the existence of private information about a person's type and on the fact that some debtors have the incentive to forego bankruptcy in order to signal their type. The theory formalizes the idea that the type of a person is relevant to trading partners in many exchange situations and by resisting opportunistic behavior in one exchange context, a person may signal valuable information about his type to trading partners in other exchange contexts. In the model, by resisting opportunistic behavior in the credit market borrowers can signal their type to the insurance market. The model is consistent with the observation that insurers use credit scores to predict the likelihood of a person filing insurance claims.

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File URL: http://repec.org/sed2006/up.28765.1140044414.pdf
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 781.

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Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:781
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htmEmail:


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Keywords: Adverse Selection; Insurance; Credit Scores; Default Risk;

Find related papers by JEL classification:

  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

This paper has been announced in the following NEP Reports:

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  1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
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Cited by:

  1. Kartik Athreya, 2008. "A Quantitative Theory of Information and Unsecured Credit," 2008 Meeting Papers 68, Society for Economic Dynamics.
  2. Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
  3. Igor Livshits & James MacGee & Michèle Tertilt, 2011. "Costly Contracts and Consumer Credit," NBER Working Papers 17448, National Bureau of Economic Research, Inc.
  4. Irina A. Telyukova & Randall Wright, 2007. "A model of money and credit, with application to the credit card debt puzzle," Working Paper 0711, Federal Reserve Bank of Cleveland.
  5. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2009. "Are harsh penalties for default really better?," Working Paper 09-11, Federal Reserve Bank of Richmond.
  6. Bulent Guler, 2010. "Innovations in Information Technology and the Mortgage Market," 2010 Meeting Papers 856, Society for Economic Dynamics.
  7. 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.
  8. Juan M. Sanchez, 2008. "The Role of Information in Consumer Debt and Bankruptcy," 2008 Meeting Papers 523, Society for Economic Dynamics.
  9. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.

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