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The Role of Information in the Rise in Consumer Bankruptcies, Working Paper 09-04

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The Role of Information in the Rise in Consumer Bankruptcies, Working Paper 09-04

DATE: April 2009

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ABSTRACT: Consumer bankruptcies rose sharply over the last 20 years in the U.S. economy. During the same period, there was impressive technological progress in the information sector. This paper provides a theory to understand and quantify the role of improvements in information technologies in consumer credit markets. Informational frictions restrict the amount of debt that can be borrowed. In fact, in the equilibrium in which investing in information is too expensive, many households borrow such small amounts that the default risk is very low. When information costs drop and informational frictions vanish, those households borrow more and default is likely after a bad shock. Quantitative exercises show that information costs have a significant effect on the bankruptcy rate. Additionally, a drop in information costs generates changes in other variables (e.g. interest rate dispersion) similar to what has occurred over the last 20 years.

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Sanchez, Juan M. (Juan Matias), 1978-. "The Role of Information in the Rise in Consumer Bankruptcies, Working Paper 09-04," Working Papers (Federal Reserve Bank of Richmond) (April 2009). https://fraser.stlouisfed.org/title/3942/item/477189, accessed on July 22, 2024.

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PUBLISHER: Federal Reserve Bank of Richmond

PLACE: Richmond

DIGITAL COPY SOURCE: Federal Reserve Bank of Richmond

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