Working Paper: CEPR ID: DP14425
Authors: Michèle Tertilt; Florian Exler
Abstract: In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers.In the second part of the survey, we describe what has by now become the workhorse model of consumer credit and default. We discuss a quantitative version of the model and use it to decompose the main reasons for default. We also use the model to illustrate how the details of default costs matter. The remainder of the survey then discusses the literature centered around two questions. First, what are the welfare implications of various bankruptcy laws? And second, what caused the rise in filings over time? We end with a discussion of open questions and fruitful avenues for future research.
Keywords: Consumer debt; Bankruptcy; Chapter 7; Default; Credit cards; Charge-offs
JEL Codes: C60; E20; G20; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer defaults (G33) | credit supply (E51) |
| credit supply (E51) | tighter credit constraints for riskier borrowers (G21) |
| credit supply (E51) | higher interest rates (E43) |
| consumer defaults (G33) | higher interest rates (E43) |
| consumer defaults (G33) | macroeconomic conditions (E66) |
| bankruptcy laws (K35) | welfare outcomes (I38) |
| bankruptcy laws (K35) | consumer protection (D18) |
| bankruptcy laws (K35) | economic stability (E63) |
| expense shocks (D12) | bankruptcy filings (K35) |
| income fluctuations (D31) | bankruptcy filings (K35) |