Essays on Unsecured Credit Markets

Tam, Xuan S., Department of Economics, University of Virginia
Young, Eric, Department of Economics, University of Virginia

Unsecured debt could help households to smooth consumption, but bankruptcy will be reflected in the pricing on these debt. That affects households' ability to smooth consumption across dates and states-of-nature. The first chapter evaluates the effect of contract length on consumption smoothing and welfare, the second and third chapters provide a unified story to explain the important changes in unsecured credit markets and study how unsecured credit markets have altered the transmission of increased income risk to consumption variability over the past three decades in the US, and the last chapter investigates the desirability of harsh penalties in improving credit access, consumption smoothing, and welfare. The first chapter develops a quantitative long-term-debt model to analyze the policy debate surrounding the Credit Card Accountability Responsibility and Disclosure Act. This chapter finds that lengthening debt contracts results in higher average borrowing interest rates. As a consequence, the amount of borrowing and the number of borrowers in equilibrium are both reduced. In addition, long-term contracts reduce welfare. Thesecondchapter developsamodelthatallowsforthequantitative measurement of how unsecured credit markets operate under asymmetric information and how changes in information alter outcomes when loan pricing is individualized. It shows that improvements in the ability of lenders to observe borrower characteristics can account for the expansion of credit available credit, the risen of unsecured debt, the increasing of bankruptcy filing rates, and the risen of bankruptcy size. Accompanying with these changes in the unsecured credit markets an increase in income inequality. The third chapter uses the model which was developed in the iii second chapter embedding in the risen of income inequality to study the effects on consumption smoothing. This chapter finds that credit markets pass through most of the increase income risk to consumption, irrespective of bankruptcy policy and the information possessed by lenders. The last chapter develops a model to study how personal bankruptcy alters the ability of households to insure labor income risk. The main finding is that the personal bankruptcy option very generally hinders the ability of households to protect themselves against labor income risk.

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PHD (Doctor of Philosophy)
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