 More punishment, less default?Annals of Finance, 2012, vol. 8, issue 4, 427-454 Abstract: The extent of lender recourse following contractual default varies greatly across economies. Intuitively, one would expect these differences to matter for default behavior at the micro-economic level and for equilibrium quantities. The objective of this paper is to study an equilibrium model in the spirit of Dubey et al. (Econometrica 73(1):1–37, 2005 ) where the implications of recourse for default patterns can be characterized. Under plausible conditions, broader recourse causes yields at origination and default rates to fall for a given set of observable borrower characteristics. On the other hand, the effect of broader recourse on average default rates and the quantity of loans issued is deeply ambiguous because the composition of the pool of borrowers can change. Raising the fraction of assets subject to recourse can well increase equilibrium default rates. I discuss the implications of these results for how one should test empirically whether recourse statutes matter for loss severity rates and the frequency of default in secured loan markets. Copyright Springer-Verlag 2012 Keywords: Recourse; Default; General equilibrium; D52; E44; G12 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:8:y:2012:i:4:p:427-454 Ordering information: This journal article can be ordered from DOI: 10.1007/s10436-012-0203-4 Access Statistics for this article Annals of Finance is currently edited by Anne Villamil More articles in Annals of Finance from Springer |
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