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Consumer credit with over-optimistic borrowers
Exler, Florian
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Livshits, Igor
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MacGee, James
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Tertilt, Michèle
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URN:
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urn:nbn:de:bsz:180-madoc-638854
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Document Type:
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Working paper
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Year of publication:
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2022
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Place of publication:
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Wien ; Mannheim [u.a.]
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Publication language:
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English
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Institution:
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School of Law and Economics > Makro- u. Entwicklungsökonomie (Tertilt 2010-)
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Subject:
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330 Economics
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Classification:
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JEL:
E21 , E49 , G18 , K35,
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Keywords (English):
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consumer credit , over-optimism , financial mistakes , bankruptcy , default , financial literacy , financial regulation , type score , cross-subsidization
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Abstract:
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We quantitatively analyze consumer credit markets with behavioral consumersand default. Our model incorporates over-optimistic and rational borrower typesinto a standard incomplete markets with consumer bankruptcy framework. Lendersprice credit endogenously, forming beliefs – type scores – about borrowers’ types.Since over-optimistic borrowers incorrectly believe they have rational beliefs, lendersdo not need to take strategic behavior into account when updating type scores. Wefind that the partial pooling of over-optimistic with rational borrowers results inspill-overs across types via interest rates, with over-optimists being cross-subsidizedby rational consumers who have lower default rates. Higher interest rates lower theaverage debt level of realists compared to a world without over-optimists. Due tooverestimating their ability to repay, over-optimists borrow too much. We evaluatethree policies to address these frictions: reducing the cost of default, educating over-optimists about their true type, and increasing borrowing cost. Of the three, onlythe lower default costs improve the welfare of over-optimists. However, rationalconsumers are made worse off by that policy.
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 | Dieser Eintrag ist Teil der Universitätsbibliographie. |
 | Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt. |
 Search Authors in
BASE:
Exler, Florian
;
Livshits, Igor
;
MacGee, James
;
Tertilt, Michèle
Google Scholar:
Exler, Florian
;
Livshits, Igor
;
MacGee, James
;
Tertilt, Michèle
ORCID:
Exler, Florian ; Livshits, Igor ; MacGee, James ; Tertilt, Michèle  ORCID: 0000-0003-0605-4141
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