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A Model of Credit Card Delinquency

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  • Kartik Athreya

    (Federal Reserve Bank of Richmond)

Abstract

Limited commitment for the repayment of consumer debt comes from two places: formal laws granting a partial or complete discharge for debts under certain circumstances, or "bankruptcy," and informal default and renegotiation, or "delinquency." In the US, both channels are used routinely. The usefulness of each of these routes as a way out of debt depends on the costs and benefits available through the other: delinquency exposes a household to collections processes initiated by lenders, while formal bankruptcy appears to carry more visible consequences for future transactions, including restrictions to even secured forms of credit. This paper is the first, to our knowledge, to evaluate unsecured consumer credit markets in the presence of both bankruptcy and delinquency. We show that these two options indeed interact in important ways. Specifically, we show that stricter control of delinquency, as defined by a relatively high ability to garnish wages, leads to more bankruptcy and lower welfare. Similarly, we find that eliminating the bankruptcy option altogether leads to a modest increase in delinquency. Perhaps most interestingly, we show that interest-rate ceilings, even though they have the standard effects in terms of limiting credit access, improve ex-ante welfare for all. This occurs because the inability to reprice debt after delinquency allows a useful level of "state contingency" in debt that does not increase average borrowing costs substantially. In essence, households have to pay the costs of delinquency in order to get the benefits of a low interest rate.

Suggested Citation

  • Kartik Athreya, 2012. "A Model of Credit Card Delinquency," 2012 Meeting Papers 981, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:981
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_981.pdf
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    References listed on IDEAS

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    1. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, pages 165-193.
    2. Ulf von Lilienfeld-Toal & Dilip Mookherjee, 2010. "The Political Economy of Debt Bondage," American Economic Journal: Microeconomics, American Economic Association, pages 44-84.
    3. Wenli Li & Michelle J. White & Ning S. Zhu, 2010. "Did bankruptcy reform cause mortgage default rates to rise?," Working Papers 10-16, Federal Reserve Bank of Philadelphia.
    4. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, pages 402-418.
    5. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, pages 402-418.
    6. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, pages 165-193.
    7. Fay, S. & Hurst, E. & White, M.J., 1998. "The Bankruptcy Decision: Does Stigma Matter?," Papers 98-01, Michigan - Center for Research on Economic & Social Theory.
    8. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1994. "Expanding the Life-Cycle Model: Precautionary Saving and Public Policy," American Economic Review, American Economic Association, pages 174-179.
    9. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2009. "Are harsh penalties for default really better?," Working Paper 09-11, Federal Reserve Bank of Richmond.
    10. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, pages 752-774.
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    Cited by:

    1. Kyle Herkenhoff, 2014. "The Impact of Consumer Credit Access on Unemployment," 2014 Meeting Papers 448, Society for Economic Dynamics.

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