IDEAS home Printed from https://ideas.repec.org/p/red/sed011/912.html
   My bibliography  Save this paper

The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default

Author

Listed:
  • Felicia Ionescu

    (Colgate University)

Abstract

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.

Suggested Citation

  • Felicia Ionescu, 2011. "The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default," 2011 Meeting Papers 912, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:912
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2011/paper_912.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.