Credit Markets with time-inconsistent agents and strategic loan default

Joydeep Bhattacharya, Monisankar Bishnu () and Min Wang ()
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Monisankar Bishnu: Indian Statistical Institute, Delhi
Min Wang: Peking University, Bejing

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: We study credit contracts under a lifecycle setting where time-inconsistent agents lack the internal commitment to stick to consumption plans and external commit- ment to repaying loans. With unrestricted credit, agents with only internal com- mitment problems may overborrow. If, additionally, they face external commitment problems, lenders endogenously impose borrowing limits similar to the ability-to- repay rules consumer financial protection agencies impose. Even with restricted credit access, except in exceptional cases, agents suffering from the twin commit- ment problems can achieve, at most, fully-sophisticated allocations. The govern- ment can achieve the first-best allocations if and only if it is assisted with endoge- nously imposed borrowing limits.

Keywords: endogenous borrowing constraints; CFPB; ability-to-pay rule; overbor- rowing; financial protection (search for similar items in EconPapers)
JEL-codes: E21 E70 G28 G40 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2023-01
New Economics Papers: this item is included in nep-mfd
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Working Paper: Credit Markets with Time-Inconsistent Agents and Strategic Loan Default (2023)
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