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Credit Lines

Author

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  • Xavier Mateos-Planas

    (Queen Mary Uiversity of London)

Abstract

This paper develops a new theory of long term unsecured credit contracts based on costly contracting that matches the data in a variety of dimensions. Credit lines are long term relations between lending firms and households that pre-specify a credit limit and interest rate in each period. Households can unilaterally default in as in the U.S. Bankruptcy code, and can unilaterally switch credit lines. Lending firms can set a new credit limit at any time, but must commit to the interest rate or not depending on the regulatory setting. We solve and characterize the equilibria, finding the resulting set of contracts as well as the distribution of households over interest rates, credit limits and wealth. We find that this model replicates the main properties of typical lending contracts. We use the theory to study the new regulatory rules in the U.S. credit card market which require a stronger commitment from lending firms not to raise interest rates discretionally. This results in tighter limits but lower interest rates, reduced indebtedness and lower default. Typically, but not for all households, the new policy improves welfare.

Suggested Citation

  • Xavier Mateos-Planas, 2011. "Credit Lines," 2011 Meeting Papers 1293, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1293
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Game Thoery and Macroeconomics
      by paragwaknis in Musings of the Sorts on 2012-07-16 23:42:41

    Citations

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    Cited by:

    1. Xavier Mateos-Planas & Giulio Seccia, 2013. "Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment," Working Papers 711, Queen Mary University of London, School of Economics and Finance.
    2. J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.
    3. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    4. Leonardo Martinez & Juan Carlos Hatchondo, 2008. "A model of credit risk without commitment," 2008 Meeting Papers 940, Society for Economic Dynamics.
    5. N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.
    6. Mateos-Planas, Xavier, 2013. "Credit limits and bankruptcy," Economics Letters, Elsevier, vol. 121(3), pages 469-472.
    7. Xavier Mateos-Planas, 2011. "Consumer default with complete markets," 2011 Meeting Papers 954, Society for Economic Dynamics.
    8. Bergerès, Anne-Sophie & d'Astous, Philippe & Dionne, Georges, 2015. "Is there any dependence between consumer credit line utilization and default probability on a term loan? Evidence from bank-customer data," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 276-286.
    9. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.

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