Consumer default and optimal consumption decisions

Alexandros Bechlioulis and Sophocles Brissimis

MPRA Paper from University Library of Munich, Germany

Abstract: We examine the optimal consumption decisions of households in a micro-founded framework that assumes two financial frictions: heterogeneity between borrowing and saving households, and endogenous default. We study default in the context of two-period overlapping processes of consumer behavior, assuming that penalty costs are imposed on borrowers if they are delinquent in the first period and are subsequently refinanced by banks. The utility function of borrowing households is specified to include a term reflecting strategic decisions as regards non-payment of debt. From the solution of the household optimization problem, we derive an augmented Euler equation for consumption, which is a function inter alia of an expected default factor. We use this equation to calculate in a static equilibrium the optimal value of the percentage of debt repaid. We finally provide an ordering by size of the household discount factor: borrowers who do not repay all of their loans have the lowest discount factor, followed in turn by borrowers who fully repay them and by savers.

Keywords: borrowing household; saving household; household behavior; consumer default; optimal consumption (search for similar items in EconPapers)
JEL-codes: C61 E21 (search for similar items in EconPapers)
Date: 2014-06-25
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/56864/1/MPRA_paper_56864.pdf original version (application/pdf)

Related works:
Journal Article: Consumer default and optimal consumption decisions (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:56864

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().