Credit Markets with Time‐Inconsistent Agents and Strategic Loan Default

Joydeep Bhattacharya, Monisankar Bishnu and Min Wang

Journal of Money, Credit and Banking, 2024, vol. 56, issue 7, 1803-1831

Abstract: We study credit contracts under a life‐cycle 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‐to‐repay 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: 2024
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https://doi.org/10.1111/jmcb.13035

Related works:
Working Paper: Credit Markets with time-inconsistent agents and strategic loan default (2023)
Working Paper: Credit Markets with Time-Inconsistent Agents and Strategic Loan Default (2023)
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