A Quantitative Theory of Information and Unsecured Credit (Revised July 2011)

FRB Richmond Working Paper No. 08-06R

66 Pages Posted: 11 Dec 2012

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Xuan S. Tam

City University of Hong Kong

Eric R. Young

University of Virginia

Date Written: July 25, 2011

Abstract

Over the past three decades six striking features of aggregates in the unsecured credit market have been documented: (1) rising personal bankruptcy rates, (2) rising dispersion in unsecured interest rates across borrowing households, (3) the emergence of a discount for borrowers with good credit ratings, (4) a reduction in average interest rates paid by borrowers, (5) an increase in aggregate debt relative to income, and (6) an increase in the amount of debt discharged in bankruptcy relative to income. The main contribution of this paper is to suggest that improvements in the ability of lenders to observe borrower characteristics can help account for a substantial proportion of most, though not all, of these observations. A central aspect of our findings is that the power of signaling is likely to be weaker when it is non-pecuniary costs, rather than the persistent component of income, that are unobservable. The ex ante welfare gains from better information are positive but small.

Keywords: unsecured credit, asymmetric information, bankruptcy

JEL Classification: D82, D91, E21

Suggested Citation

Athreya, Kartik and Tam, Xuan S. and Young, Eric R., A Quantitative Theory of Information and Unsecured Credit (Revised July 2011) (July 25, 2011). FRB Richmond Working Paper No. 08-06R, Available at SSRN: https://ssrn.com/abstract=2187905 or http://dx.doi.org/10.2139/ssrn.2187905

Kartik Athreya (Contact Author)

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

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

Xuan S. Tam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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