Credit Exclusion in Quantitative Models of Bankruptcy: Does it Matter?

33 Pages Posted: 8 Dec 2012

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Hubert Janicki

U.S. Census Bureau

Date Written: 2006

Abstract

This article takes a first step in evaluating a commonly used assumption in recent quantitative analyses of unsecured household borrowing -- the temporary exclusion of defaulting borrowers from credit markets. Exclusion from credit markets is an attractive modeling device for tractably modeling default on both consumer debt and sovereign debt. Nonetheless, such exclusion is not easily supported and deserves more justification than has been provided in the available literature. In particular, a key problem in choosing to punish default ex post by exclusion is that lenders and borrowers forgo opportunities for mutually beneficial trade that exist after default. In this paper we perform a set of experiments in a standard model of bankruptcy to clarify the circumstances in which exclusion is, or is not, likely to be an innocuous simplification. We then examine the possibility that changes to exclusion-related penalties occurring in the 1990s were important for the subsequent rise of household debt and personal bankruptcy.

Suggested Citation

Athreya, Kartik and Janicki, Hubert, Credit Exclusion in Quantitative Models of Bankruptcy: Does it Matter? (2006). FRB Richmond Economic Quarterly, vol. 92, no. 1, Winter 2006, pp. 17-49, Available at SSRN: https://ssrn.com/abstract=2186149

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Hubert Janicki

U.S. Census Bureau

4600 Silver Hill Road
Washington, DC 20233
United States

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