Working Paper: NBER ID: w14514
Authors: Casey B. Mulligan
Abstract: When asset values fall, the owners of collateralized loans are not in an enviable position. Nonetheless, they possess a kind of monopoly power over their borrowers that they do not possess when borrowers are solvent. Lenders maximize profits by price discriminating, but create deadweight costs in the process. From the perspective of the aggregate labor market, it is as if lenders were levying their own labor income tax, on top of the taxes already levied by public treasuries. Governments have an incentive to regulate this price discrimination, repudiate part of the private debts, cut their own tax rates, or acquire the debt themselves. These conditions may describe both the 1930s and economic events today.
Keywords: mortgage debt; unemployment insurance; labor market; debt forgiveness
JEL Codes: E24; H21; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collateral values decrease (G32) | Borrowers consider paying less than their full loan amount (G51) |
| Collateral values decrease (G32) | Lenders optimally discriminate among borrowers (G21) |
| Lenders optimally discriminate among borrowers (G21) | Distortion in borrower behavior (E71) |
| Distortion in borrower behavior (E71) | Labor income tax effect (H31) |
| Low collateral values (G33) | High effective tax rates on labor income (H31) |
| Debt forgiveness (H63) | Improve outcomes for borrowers and lenders (G21) |
| Debt overhang (H63) | Incentives for borrowers to reduce income (G51) |
| Debt overhang (H63) | Affect labor supply (J29) |
| Economic downturns (E32) | Labor supply distortions attributed to private debt collection (J79) |
| Fall in collateral values (G33) | Increasing disincentives for worst-off borrowers to earn income (H31) |