Default and aggregate income

Journal Article (Journal Article)

This paper studies how default varies with aggregate income. We analyze a model in which optimal contracts enable risk sharing of privately observed, idiosyncratic income by allowing for default. Default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance. Default penalties ensure that only these agents default. We show that default can occur under the optimal contract and that default provisions vary with aggregate income. We provide conditions such that both the amount of default and default penalties vary countercyclically with aggregate income and show that the default rate can be discontinuous. © 2004 Elsevier Inc. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Rampini, AA

Published Date

  • June 1, 2005

Published In

Volume / Issue

  • 122 / 2

Start / End Page

  • 225 - 253

International Standard Serial Number (ISSN)

  • 0022-0531

Digital Object Identifier (DOI)

  • 10.1016/j.jet.2004.04.004

Citation Source

  • Scopus