Mortgage Debt and Social Externalities

44 Pages Posted: 19 Aug 2015 Last revised: 15 Jun 2018

See all articles by Cristian Badarinza

Cristian Badarinza

National University of Singapore (NUS)

Date Written: June 6, 2018

Abstract

In an attempt to keep up with the social standards defined by their peer group, households can use long-term collateralised lending to finance purchases of goods that signal social value - most notably, real estate. Because in the social status game somebody's advance is always somebody else's regress, this behaviour can lead to inefficient allocations, making the economy as a whole more financially vulnerable. In this paper, we show that prudential policy taking the form of collateral constraints can mitigate the negative consequences of social arms races, and potentially improve household welfare. We introduce preferences for social status in a calibrated life cycle framework with heterogeneous agents, and find that positional concerns lead to a higher build-up of debt and a net loss of resources. In equilibrium, the optimal collateral policy results from the trade-off between a usual purely distortionary effect, and the negative social externalities of over-borrowing.

Keywords: Mortgage debt, Social status, Financial regulation

JEL Classification: D15, G18, G41

Suggested Citation

Badarinza, Cristian, Mortgage Debt and Social Externalities (June 6, 2018). Available at SSRN: https://ssrn.com/abstract=2519233 or http://dx.doi.org/10.2139/ssrn.2519233

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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