This paper develops a new theory of long term unsecured credit contracts based on costly contracting that matches the data in a variety of dimensions. Credit lines are long term relations between lending firms and households that pre-specify a credit limit and interest rate in each period. Households can unilaterally default in as in the U.S. Bankruptcy code, and can unilaterally switch credit lines. Lending firms can set a new credit limit at any time, but must commit to the interest rate or not depending on the regulatory setting. We solve and characterize the equilibria, finding the resulting set of contracts as well as the distribution of households over interest rates, credit limits and wealth. We find that this model replicates the main properties of typical lending contracts. We use the theory to study the new regulatory rules in the U.S. credit card market which require a stronger commitment from lending firms not to raise interest rates discretionally. This results in tighter limits but lower interest rates, reduced indebtedness and lower default. Typically, but not for all households, the new policy improves welfare.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Timothy J Kehoe & David K Levine, 1993.
"Debt Constrained Asset Markets,"
Levine's Working Paper Archive
1276, David K. Levine.
- Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007.
"A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,"
Econometric Society, vol. 75(6), pages 1525-1589, November.
- 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).
- Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 07-16, Federal Reserve Bank of Philadelphia.
- James Costain & Michael Reiter, 2005.
"Business Cycles, Unemployment Insurance and the Calibration of Matching Models,"
215, Barcelona Graduate School of Economics.
- Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
- James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series 1008, CESifo Group Munich.
- James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
- Athreya, Kartik B. & Simpson, Nicole B., 2006.
"Unsecured debt with public insurance: From bad to worse,"
Journal of Monetary Economics,
Elsevier, vol. 53(4), pages 797-825, May.
- Kartik Athreya & Nicole B. Simpson, 2004. "Unsecured debt with public insurance : from bad to worse," Working Paper 03-14, Federal Reserve Bank of Richmond.
- Josep Pijoan-Mas 2 & Antonia Díaz & José-Víctor Ríos-Rull, 2001.
"Habit Formation: Inplications For The Wealth Distribution,"
Economics Working Papers
we015114, Universidad Carlos III, Departamento de Economía.
- Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
- Igor Livshits & James MacGee & Michele Tertilt, 2006.
"Accounting for the Rise in Consumer Bankruptcies,"
University of Western Ontario, Economic Policy Research Institute Working Papers
20066, University of Western Ontario, Economic Policy Research Institute.
- Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Accounting for the Rise in Consumer Bankruptcies," NBER Working Papers 13363, National Bureau of Economic Research, Inc.
- Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
- Makoto Nakajima, 2010.
"Business cycles in the equilibrium model of labor market search and self-insurance,"
10-24, Federal Reserve Bank of Philadelphia.
- Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.
- Satyajit Chatterjee & Dean Corbae, 2004. "A Competitive Theory of Credit Scoring," 2004 Meeting Papers 823, Society for Economic Dynamics.
- Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 0910, Economics Division, School of Social Sciences, University of Southampton.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1293. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.