Default Option, Risk-Aversion and Household Borrowing Behaviour

Ingrid Groessl () and Ulrich Fritsche
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Ingrid Groessl: Department for Economics and Politics, University of Hamburg

No 200705, Macroeconomics and Finance Series from University of Hamburg, Department of Socioeconomics

Abstract: Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable.

Keywords: Consumption; exponential utility; certainty equivalent; households; default option; borrowing; risk; risk aversion; risk management (search for similar items in EconPapers)
JEL-codes: D11 D14 D18 D53 D81 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2007-09
New Economics Papers: this item is included in nep-ban and nep-upt
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hep:macppr:200705

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