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A quantitative theory of unsecured consumer credit with risk of default

By Satyajit Chatterjee, Makoto Nakajima and Dean Corbae


Very preliminary We analyze a model of unsecured consumer loans. We characterize equilibrium behavior within the confines of U.S. bankruptcy law. Credit suppliers take deposits from households and offer loans via a menu of credit levels and interest rates in a competitive industry with free entry and zero costs. Borrowers have the option to default on their loans but are punished with a version of Chapter 7 U.S. bankruptcy rules. In our model it is poor people that want to default, and indeed they do so often. We characterize the circumstances that lead to equilibrium default, and the steady states for this environment, which requires the specification of credit limits and interest rates offered by the intermediary, of decision rules for households ’ asset holdings and bankruptcy decisions, and a stationary measure of households, with the property that firms maximize and have zero profits and households maximize and the allocation is stationary. Our theory is motivated by some key facts: (i) unsecured consumer credit is currently 10 % of U.S. disposable personal income, (ii) close to 1 % of U.S. households file for Chapter 7 bankruptcy and (iii) households that go bankrupt are in poor financial condition. We thank Santi Budria for help with the use of the 1998 SCF, and the attendants to seminars a

Year: 2003
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