Bank of Canada
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Institutional Affiliation: University of Western Ontario
Information about this author at RePEc
NBER Working Papers and Publications
|September 2011||Costly Contracts and Consumer Credit|
with Igor Livshits, Michèle Tertilt: w17448
Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, as well as increased dispersion of interest rates. Using the Survey of Consumer Finance and interest rate data collected by the Board of Governors, we find evidence supporting these predictions, as the dispersion of credit card interest rates nearly tripled, and the share...
|September 2007||Accounting for the Rise in Consumer Bankruptcies|
with Igor Livshits, Michèle Tertilt: w13363
Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue th...
Published: Igor Livshits & James MacGee & Michele Tertilt, 2010.
"Accounting for the Rise in Consumer Bankruptcies,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 2(2), pages 165-93, April.
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