Credit Markets with Time-Inconsistent Agents and Strategic Loan Default

Joydeep Bhattacharya, Monisankar Bishnu and Min Wang

ISU General Staff Papers from Iowa State University, Department of Economics

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

Date: 2023-01-22
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mfd
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Related works:
Working Paper: Credit Markets with time-inconsistent agents and strategic loan default (2023)
Working Paper: Time inconsistency and endogenous borrowing constraints (2020)
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