Loan Guarantees for Consumer Credit Markets

61 Pages Posted: 18 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: September 30, 2011

Abstract

Loan guarantees are arguably the most widely used policy intervention in credit markets, especially for consumers. This may be natural, as they have several features that, a priori, suggest that they might be particularly effective in improving allocations. However, despite this, little is actually known about the size of their effects on prices, allocations, and welfare.

In this paper, we provide a quantitative assessment of loan guarantees, in the context of unsecured consumption loans. Our work is novel as it studies loan guarantees in a rich dynamic model where credit allocation is allowed to be affected by both limited commitment frictions and private information.

Our findings suggest that consumer loan guarantees may be a powerful tool to alter allocations that, if carefully arranged, can improve welfare, sometimes significantly. Specifically, our key findings are that (i) under both symmetric and asymmetric information, guaranteeing small consumer loans nontrivially alters allocations, and strikingly, yields welfare improvements even after a key form of uncertainty — one's human capital level — has been realized, (ii) larger guarantees change allocations very significantly, but lower welfare, sometimes for all household-types, and (iii) substantial further gains are available when guarantees are restricted to households hit by large expenditure shocks.

Keywords: bankruptcy, unsecured credit, loan guarantees

JEL Classification: H81, D82, D91, E21

Suggested Citation

Athreya, Kartik and Tam, Xuan S. and Young, Eric R., Loan Guarantees for Consumer Credit Markets (September 30, 2011). FRB Richmond Working Paper No. 11-06, Available at SSRN: https://ssrn.com/abstract=2190613 or http://dx.doi.org/10.2139/ssrn.2190613

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
797
PlumX Metrics