A quantitative theory of unsecured consumer credit with risk of default

Satyajit Chatterjee, Dean Corbae, Makoto Nakajima, Victor Rios-Rull

Research output: Contribution to journalArticlepeer-review

176 Scopus citations

Abstract

We study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. We prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on its loans. We show that our model accounts for the main statistics regarding bankruptcy and unsecured credit while matching key macroeconomic aggregates, and the earnings and wealth distributions. We use this model to address the implications of a recent policy change that introduces a form of "means testing" for households contemplating a Chapter 7 bankruptcy filing. We find that this policy change yields large welfare gains.

Original languageEnglish (US)
Pages (from-to)1525-1589
Number of pages65
JournalEconometrica
Volume75
Issue number6
DOIs
StatePublished - Nov 1 2007

Keywords

  • Bankruptcy
  • Default risk
  • General equilibrium

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