Credit limits and bankruptcy

Xavier Mateos-Planas

Economics Letters, 2013, vol. 121, issue 3, 469-472

Abstract: Credit cards offer a limit, rather than a specific loan size, at a pre-approved interest rate. This paper studies the determination of these credit limits jointly with default in the presence of one-period debt. I adapt the standard incomplete markets macroeconomic model of one-period unsecured debt with the optimal choice of credit limit. Endogenous limits and positive default coexist. A numerical exercise illustrates the consequences of various factors for indebtedness, credit limits, and bankruptcy.

Keywords: Endogenous credit limits; Borrowing constraints; Bankruptcy; Default; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E20 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:121:y:2013:i:3:p:469-472

DOI: 10.1016/j.econlet.2013.09.033

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