Loan guarantees for consumer credit markets

Kartik Athreya, Xuan Tam () and Eric Young

No 11-06, Working Paper from Federal Reserve Bank of Richmond

Abstract: Loan guarantees are arguably the most widely used policy intervention in credit markets, especially for consumers. This may be natural, as they have several features that, a priori, suggest that they might be particularly effective in improving allocations. However, despite this, little is actually known about the size of their effects on prices, allocations, and welfare. ; In this paper, we provide a quantitative assessment of loan guarantees, in the context of unsecured consumption loans. Our work is novel as it studies loan guarantees in a rich dynamic model where credit allocation is allowed to be affected by both limited commitment frictions and private information. ; Our findings suggest that consumer loan guarantees may be a powerful tool to alter allocations that, if carefully arranged, can improve welfare, sometimes significantly. Specifically, our key findings are that (i) under both symmetric and asymmetric information, guaranteeing small consumer loans nontrivially alters allocations, and strikingly, yields welfare improvements even after a key form of uncertainty?one's human capital level?has been realized, (ii) larger guarantees change allocations very significantly, but lower welfare, sometimes for all household-types, and (iii) substantial further gains are available when guarantees are restricted to households hit by large expenditure shocks.

Keywords: Financial markets; Consumer finance; Bankruptcy; Credit; Loans (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-dge
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Related works:
Journal Article: Loan Guarantees for Consumer Credit Markets (2014)
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