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A Quantitative Theory of Information and Unsecured Credit

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  • Kartik Athreya

    (Federal Reserve Bank of Richmond)

Abstract

Over the past three decades four striking features of aggregates in the unsecured credit market have been documented: (1) rising availability of credit along both the intensive and extensive margins, (2) rising debt accumulation, (3) rising bankruptcy rates and discharge in bankruptcy, and (4) rising dispersion in interest rates across households. We provide a quantitative model of unsecured credit to interpret these facts; a novel contribution is that we allow for asymmetric information with individualized loan pricing. Our main finding is that all four outcomes mentioned above are consistent with the hypothesis that lenders observe more components of individual income now than in earlier periods. In addition, the paper makes a methodological contribution: an algorithm to locate equilibria with individualized pricing under asymmetric information, a task that is complicated by the requirement that off-equilibrium beliefs and prices are essential for equilibrium outcomes.

Suggested Citation

  • Kartik Athreya, 2008. "A Quantitative Theory of Information and Unsecured Credit," 2008 Meeting Papers 68, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:68
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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