The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default
We analyse, theoretically and quantitatively, the interactions between different forms of unsecured credit and their implications for default behaviour of young U.S. households. One type of credit mimics credit cards in the U.S. and the default option resembles a bankruptcy filing under Chapter 7 and the other type mimics student loans in the U.S. and the default option resembles Chapter 13 of the U.S. Bankruptcy Code. In the credit card market financial intermediary offers a menu of credit limits and interest rates based on individual credit scores. Scores evolve based on past borrowing and repayment behaviour. In the student loan market default has no effect on credit scores. The government sets the interest rate and chooses a wage garnishment to pay for the cost associated with default. We prove the existence of a steady-state equilibrium and characterise the circumstances under which a household defaults on each of these loans depending on household characteristics as well as on the financial arrangements in both markets. Our model is consistent with the main facts regarding borrowing and default on both forms of unsecured credit for young U.S. households. We show that there are important cross-market effects: financial arrangements in one market non-trivially affect default in the other market. We plan to use the model to quantify the effects of increased college debt burdens and more severe credit card terms on the increase in default rates in recent years and to conduct policy analysis regarding loan terms and bankruptcy arrangements in both markets.
|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.:
- Nicole Simpson & Felicia Ionescu, 2010.
"Credit Scores and College Investment,"
2010 Meeting Papers
666, Society for Economic Dynamics.
- Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
- Chatterjee, Satyajit & Corbae, Dean & Ríos-Rull, José-Víctor, 2008.
"A finite-life private-information theory of unsecured consumer debt,"
Journal of Economic Theory,
Elsevier, vol. 142(1), pages 149-177, September.
- Satyajit Chatterjee & Dean Corbae & José-Víctor Ríos-Rull, 2007. "A finite-life private-information theory of unsecured consumer debt," Working Papers 07-14, Federal Reserve Bank of Philadelphia.
- 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, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 07-16, Federal Reserve Bank of Philadelphia.
- 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).
When requesting a correction, please mention this item's handle: RePEc:red:sed011:912. 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.