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Consumer default with complete markets

Author

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  • Xavier Mateos-Planas

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

Abstract

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.

Suggested Citation

  • Xavier Mateos-Planas, 2011. "Consumer default with complete markets," 2011 Meeting Papers 954, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:954
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    References listed on IDEAS

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    1. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2005. "Default and Punishment in General Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 1-37, January.
    2. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    3. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
    4. Jose-Victor Rios-Rull & Xavier Mateos-Planas, 2009. "Credit Lines," 2009 Meeting Papers 894, Society for Economic Dynamics.
    5. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-1164, December.
    6. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    7. 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.
    8. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
    9. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    10. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    11. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. repec:spr:joecth:v:64:y:2017:i:4:d:10.1007_s00199-015-0939-y is not listed on IDEAS
    2. Xavier Mateos-Planas & Jose-Victor Rios-Rull & Cristina Arellano, 2013. "Partial Default," 2013 Meeting Papers 765, Society for Economic Dynamics.
    3. Feijó, Ricardo Luis Chaves, 2013. "The General Equilibrium Framework with Default and Collateral," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 67(3), September.
    4. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.

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