Are household consumption decisions affected by past due unsecured debt? Theory and evidence

We study delinquent and non‐performing loans in consumer credit markets and their implications for consumer behaviour. By introducing endogenously non‐payment of debt in the inter‐temporal optimization problem of a representative borrowing household, we derive analytically an augmented consumption Euler equation featuring a risk factor in terms of expected non‐performing debt and delinquent debt. We find that the presence of the risk factor differentiates the estimated values of the preference parameters and enhances the model's structure in comparison to the benchmark representative agent model with full debt repayment, which seems to be an incomplete description of consumer behaviour.