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|
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