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Consumer default with complete markets

  • Xavier Mateos-Planas

    (Queen Mary University of London, U.K.)

This paper studies properties of economies with complete markets where there is positive default on consumer debt. Households can default partially, at a punishment cost, and intermediaries price this risk competitively. This en- vironment yields only partial insurance. The risk-based pricing of debt makes it too costly for the borrower to achieve full insurance and there is too little trade in securities. Consumption, as well as debt and the default rate, are positively correlated with idiosyncratic changes in income. This is in contrast with existing literature. Unlike the literature with default, there are no restric- tions on the set of state contingent securities that are issued. Relative to the literature on lack of commitment, limited trade arises without debt constraints that rule default out. The approach in this paper may have novel implications for understanding consumption inequality.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 954.

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Date of creation: 2011
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Handle: RePEc:red:sed011:954
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  1. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  2. Jose-Victor Rios-Rull & Xavier Mateos-Planas, 2009. "Credit Lines," 2009 Meeting Papers 894, Society for Economic Dynamics.
  3. 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.
  4. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  5. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304, Cowles Foundation for Research in Economics, Yale University.
  6. 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.
  7. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  8. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  9. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
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