Bankruptcy and Delinquency in a Model of Unsecured Debt

Abstract

At an aggregate level, formal default via bankruptcy and informal default via delinquency are both quantitatively important in consumer credit markets. In this paper, we use a variety of microeconomic data sources to construct a salient set of facts on the use of unsecured debt and both formal and informal default. We then show that these facts, which describe both the cross-sectional and dynamic behavior of borrowing and default, can be well understood through a quantitative model of consumer credit with empirically plausible representations of labor market risks, social safety nets, and debt-default options.

Keywords: Consumer Debt, Bankruptcy, Default, Life cycle, Idiosyncratic risk

JEL Classification: E43, E44, G33