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Information Technology and the Rise of Household Bankruptcy

Borghan Nezami Narajabad

Review of Economic Dynamics, 2012, vol. 15, issue 4, 526-550

Abstract: Several studies have attributed the rise of household bankruptcy in the past two decades to the decline of social stigma associated with default. Stigma explanations, however, cannot account for the large increase in the use of unsecured credit during this period. I explain the simultaneous increase in bankruptcy rates and unsecured credit as the result of improvements in credit-rating technologies. Using an environment where borrowers face heterogeneous default costs (unobservable by creditors), I show that such improvements will lead to agents with high default costs, i.e., "safe" borrowers, being able to borrow more. A quantitative example illustrates that this increased access to credit can be large enough to raise both equilibrium borrowing and default rates. (Copyright: Elsevier)

Keywords: Consumer bankruptcy; Information and market efficiency; Rating agencies (search for similar items in EconPapers)
JEL-codes: G14 E44 K35 E21 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.red.2012.06.002

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