Consumer default with complete markets
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.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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.:
- 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.
- Satyajit Chatterjee, 2015.
"An Equilibrium Model of the Timing of Bankruptcy Filings,"
2015 Meeting Papers
487, Society for Economic Dynamics.
- Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
- Igor Livshits & James MacGee & Michele Tertilt, 2005.
"Consumer Bankruptcy: A Fresh Start,"
04-011, Stanford Institute for Economic Policy Research.
- William R. Zame, 1990.
"Efficiency and the Role of Default When Security Markets are Incomplete,"
UCLA Economics Working Papers
585, UCLA Department of Economics.
- 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 1142-64, December.
- William R. Zame, 1992. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 673, UCLA Department of Economics.
- P. Dubey & J. Geanakoplos & M . Shubik, 2001.
"Default and Punishment in General Equilibrium,"
Department of Economics Working Papers
01-07, Stony Brook University, Department of Economics.
- 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.
- Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
- Patrick J. Kehoe & Fabrizio Perri, 2000.
"International Business Cycles with Endogenous Incomplete Markets,"
NBER Working Papers
7870, National Bureau of Economic Research, Inc.
- Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
- Patrick J. Kehoe & Fabrizio Perri, 2000. "International business cycles with endogenous incomplete markets," Staff Report 265, Federal Reserve Bank of Minneapolis.
- 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.
- Timothy J. Kehoe & David K. Levine, 1992.
"Debt constrained asset markets,"
445, Federal Reserve Bank of Minneapolis.
- Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:954. 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.