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Decomposing Present Value Effects on Defaults: Evidence from a large-scale restructuring experiment

Deniz Aydin

No 1402, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This study quantitatively assesses the importance of balance sheet present-value effects in the con- text of consumer debt restructuring. We design and implement a large scale randomized trial where we offer various type of debt relief to delinquent borrowers. Our design deliberately varies the inter- est rate and temporary payment reductions, as well as the maturity of the restructured loans, all while holding consumers’ outstanding debt balance constant. We find that interest rate reductions lead to a persistent decrease in delinquency rates, in contrast, the effect of short-term forbearance on delinquen- cies disappears in the long-run. Decomposing the effects of periodic payments and the present-value of the stream of future obligations, we reject models where balance sheet effects are absent and de- faults are driven purely by payment difficulties, or models where a dollar of cash flow change has the same effect as a dollar change in present-value. From the lender’s perspective, offering neither short-term forbearance nor rate reductions is profitable for the typical participant, however balance sheet effects are sufficiently strong to make it the most efficient way to incentive intermediaries.

Date: 2019
New Economics Papers: this item is included in nep-exp
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