Finite-Life, Private-Information Theory of Unsecured Debt
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.
|Date of creation:||03 Dec 2006|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Douglas W. Diamond, 1998.
"Reputation Acquisition in Debt Markets,"
Levine's Working Paper Archive
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- Harold L. Cole & James Dow & William B. English, 1994.
"Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt,"
180, Federal Reserve Bank of Minneapolis.
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- Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
- Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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