Working Paper: CEPR ID: DP8359
Authors: Thomas Hintermaier; Winfried Koeniger
Abstract: We provide a model with endogenous portfolios of secured and unsecured household debt. Secured debt is collateralized by owner-occupied housing whereas unsecured debt can be discharged according to bankruptcy regulations. We show that the calibrated model matches important quantitative characteristics of observed wealth and debt portfolios for prime-age consumers in the U.S. We then establish the quantitative result that home equity does not serve as informal collateral for unsecured debt since, as in the data, unsecured debtors hold small amounts of home equity in equilibrium. Thus, observed variations in homestead exemptions, which are an important part of U.S. bankruptcy regulation, have a small effect on the quantity and price of unsecured debt.
Keywords: bankruptcy; collateral; commitment; household debt portfolios; housing; income risk
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| housing wealth (G51) | unsecured debt (H63) |
| homestead exemptions (D14) | unsecured debt (H63) |
| unsecured debtors hold small amounts of home equity (G51) | home equity does not serve as informal collateral for unsecured debt (G51) |
| limited commitment problem from bankruptcy options (G33) | constraints influencing portfolio choices (G11) |