N. Narajabad, Borghan (2010): Information Technology and the Rise of Household Bankruptcy.
Download (890Kb) | Preview
Several studies attributed the rise of household bankruptcy in the past two decades to the decline of social stigma associated with default. Stigma explanations, however, cannot account for the increase of credit availability during this period. I try to explain both of these facts as a result of a more informative credit rating technology.
I study an adverse selection environment where borrowers are heterogeneous with respect to their cost of default. Creditors have access to a rating technology which provides an exogenous signal about borrowers' default costs. Equilibrium contracts subject each borrower to a credit limit such that the creditors' expected profit, conditional on the signal about the borrower's default cost, is zero. As the exogenous signal becomes more informative, the credit market will provide higher credit limits for borrowers with high default costs, and lowers credit limits of borrowers with low costs of default. Hence a more informative signal allows those with high default costs to borrow more, making them more likely to default, while decreasing borrowing and default by those with low default costs.
Using Simulated Method of Moments, I estimate the model parameters to match the increases in the average consumer credit card limit, the average unsecured consumer debt level and the spread of the credit limit distribution from 1992 to 1998 using the Survey of Consumer Finance's data. The model does well in matching the targeted moments and can account for one third to half of the increase in the number of bankruptcy filings from 1992 to 1998.
|Item Type:||MPRA Paper|
|Original Title:||Information Technology and the Rise of Household Bankruptcy|
|Keywords:||Consumer Bankruptcy, Information and Market Efficiency, Rating Agencies.|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
K - Law and Economics > K3 - Other Substantive Areas of Law > K35 - Personal Bankruptcy Law
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Borghan Nezami Narajabad|
|Date Deposited:||04. Mar 2010 14:25|
|Last Modified:||12. Feb 2013 03:39|
 Athreya, Kartik, 2005. “Shame as it Ever Was: Stigma and Personal Bankruptcy,”Federal Reserve Bank of Richmond Economic Quarterly, 92(2), 1-19.
 Athreya, Kartik, Xuan S. Tam and Eric R. Young 2008. “A Quantitative Theory of Information and Unse- cured Credit,”Federal Reserve Bank of Richmond, working paper 08-6.
 Ausubel, Lawrence M, 1991. “The Failure of Competition in the Credit Card Market,”American Economic Review, 81(1), 50-81.
 Aiyagari, S Rao, 1994. “Uninsured Idiosyncratic Risk and Aggregate Saving,”The Quarterly Journal of Economics, 109(3), 659-84.
 Barron, John M. and Michael Staten, 2003. “The Value of Comprehensive Credit Report: Lessons from the U.S. Experience,”in Credit Reporting Systems and the International Economy, edited by Margaret J. Miller, 273-310. MIT Press.
 Berger, Allen N., 2003. “The Economic Effects of Technologial Progress: Evidence from the Banking In- dustry,”Journal of Money, Credit and Banking, 35(2), 141-76.
 Calem, Paul S.; Michael B. Gorday and Loretta J. Mester, 2006. “Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence,”Journal of Banking and Finance 30(6), 1653-1685.
 Calem, Paul S. and Loretta J. Mester, 1995. “Consumer Behavior and the Stickiness of Credit-Card Interest Rates,”American Economic Review, 85(5), 1327-1336.
 Chatterjee, Satyajit; Dean P. Corbae and Jose-Victor Rios-Rull, 2005. “Credit Scoring and Competitive Pricing of Default Risk,”mimeo.
 Chatterjee, Satyajit; Dean P. Corbae, Makoto Nakajima and Jose-Victor Rios-Rull, 2007. “A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,”Econometrica, 75(6), 1525-1589.
 Domowitz, Ian and Robert L. Sartain, 1999. “Determinants of the Consumer Bankruptcy Decision,”The Journal of Finance, 51(1), 403-420.
 Drozd, Lukasz A. and Jaromir B. Nosal, 2008. “Competing for Customers: A Search Model of the Market for Unsecured Credit,”mimeo.
 Edelberg, Wendy, 2003. “Risk-based Pricing of Interest Rates in Household Loan Markets,”Finance and Economics Discussion Series . Washington: Board of Governors of the Federal Reserve System 2003-62.
 Fay, Scott; Erik Hurst and Michelle J. White, 2002. “The Household Bankruptcy Decision,”American Eco- nomic Review, 92(3), 706-718.
 Gross, David B. and Nicholas S. Souleles, 2002. “An Empirical Analysis of Personal Bankruptcy and Delin- quency,”The Review of Financial Studies, 15(1), 319-347.
 Gross, David B. and Nicholas S. Souleles, 2002. “Do Liquidity Constraints and Interest Rates Matter for Consumer Behaviour? Evidence from Credit Card Data,”The Quarterly Journal of Economics, 117(1), 149- 185.
 Huggett, Mark, 1993. “The risk-free rate in heterogeneous-agent incomplete-insurance economies,”Journal of Economic Dynamics and Control, 17(5-6), 953-969.
 Li, Wenli and Pierre-Daniel Sarte, 2003. “The macroeconomics of U.S. consumer bankruptcy choice: Chap- ter 7 or Chapter 13?”Federal Reserve Bank of Philadelphia, Working Paper 03-14.
 Livshits, Igor; James MacGee and Michele Tertilt, 2009. “Accounting for the Rise in Consumer Bankrupt- cies, ”American Economic Journal Macroeconomics, forthcoming.
 Livshits, Igor; James MacGee and Michele Tertilt, 2009. “Costly Contracts and Consumer Credit, ”mimeo
 Mateos-Planas, Xavier and Jose-Victor Rios-Rull, 2007. “Credit Lines, ”mimeo.
 Musto,DavidK.2004.“WhatHappensWhenInformationLeavesaMarket?EvidencefromPostbankruptcy Consumers, ”Journal of Business, 77(4), 725-748.
 Padilla, A. Jorge and Marco Pagano. 2000. “Sharing default information as a borrower discipline de- vice,”European Economic Review, 44(10), 1951-1980.
 Sanches, Juan M. 2009. “The role of information in the rise in consumer bankruptcies,”Federal Reserve Bank of Richmond, Working Paper 09-4.
 Sullivan, Teresa A.; Elizabeth Warren and Jay Lawrence Westbrook. 2000. The Fragile Middle Class. Yale University PRess, New Haven and London.