The Welfare Effect of Access to Credit

Abstract

I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption-risk sharing more inefficient. I calibrate the model using U.S. data on credit-card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare.

Keywords: Money, Credit, Risk Sharing, Limited Participation

JEL Classification: E51, E41