A Quantitative Theory of Unsecured Consumer Credit with Risk of Default

69 Pages Posted: 18 Jun 2002

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Makoto Nakajima

Federal Reserve Bank of Philadelphia

José-Victor Rios-Rull

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2007

Abstract

The authors study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. They prove existence of a steady state equilibrium and characterize the circumstances under which a household defaults on its loans. The authors show that their model accounts for the main statistics regarding bankruptcy and unsecured credit while matching key macroeconomic aggregates and the earnings and wealth distributions. They use this model to address the implications of a recent policy change that introduces a form of "means-testing" for households contemplating a Chapter 7 bankruptcy filing. The authors find that this policy change yields large welfare gains.

Keywords: Default, bankruptcy, consumer credit, precautionary savings

JEL Classification: D58, D91, G33, E21

Suggested Citation

Chatterjee, Satyajit and Corbae, Philip Dean and Nakajima, Makoto and Rios-Rull, José-Victor, A Quantitative Theory of Unsecured Consumer Credit with Risk of Default (June 2007). FRB Philadelphia Working Paper No. 07-16. Available at SSRN: https://ssrn.com/abstract=314702 or http://dx.doi.org/10.2139/ssrn.314702

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Philip Dean Corbae

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
512-471-3211 (Phone)
512-471-3510 (Fax)

Makoto Nakajima

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

José-Victor Rios-Rull

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7767 (Phone)
215-573-2057 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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