Showing papers by "Juan M. Sánchez published in 2014"
TL;DR: This article introduced a model of unsecured consumer credit in the presence of both bankruptcy and delinquency and found that delinquency is readily used by borrowers with the worst labor market outcomes, even those with relatively minor levels of debt.
Abstract: The two channels of default on unsecured consumer debt are (i) bankruptcy, which legally grants partial or complete removal of unsecured debt under certain circumstances, and (ii) delinquency, which is informal default via nonpayment. In the United States, both channels are used routinely. This paper introduces a model of unsecured consumer credit in the presence of both bankruptcy and delinquency. Our model yields three new findings: First, with respect to the choice between bankruptcy and delinquency, labor income shocks matter. Specifically, we find delinquency is readily used by borrowers with the worst labor market outcomes, even those with relatively minor levels of debt. In contrast, bankruptcy is used by households with relatively high debts, but whose long-run earnings prospects are high enough to make interest rate penalties from delinquency too large. Second, financial distress is persistent: households in poor financial conditions stay in that state for several quarters. Third, in broad terms, bankruptcy and delinquency are “substitutes,” with bankruptcy increasing as delinquency costs rise.
29 citations
TL;DR: This article measured the relative roles of bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession, and found that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both.
28 citations
TL;DR: In this article, a model of mortgage defaults is built into the standard incomplete markets model and interest rates on mortgages are determined in equilibrium according to the risk of default, and default-prevention policies are evaluated.
Abstract: A model of mortgage defaults is built into the standard incomplete markets model. Households face income and house-price shocks and purchase houses using long-term mortgages. Interest rates on mortgages are determined in equilibrium according to the risk of default. The model accounts for the observed patterns of housing consumption, mortgage borrowing, and defaults. Default-prevention policies are evaluated. The mortgage default rate, housing demand, households’ ability to self-insure, and welfare are hump-shaped in the degree of recourse (the level of defaulters’ wealth that can be garnished). Two forces affect default. More recourse implies that the punishment for default is harsher; this reduces the default rate. But more recourse also decreases the interest rates offered; this increases borrowing and the default rate. Introducing loan-to-value (LTV) limits for new mortgages contains borrowing, lowering the default rate with negligible negative effects on housing demand. The combination of recourse mortgages and LTV limits reduces the default rate while boosting housing demand. The behavior of economies with alternative prudential regulations is evaluated during a boom-bust episode in aggregate house prices. In the economy with both recourse mortgages and LTV limits, the mortgage default rate is less sensitive to fluctuations in aggregate house prices.
12 citations
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TL;DR: This paper developed a model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle.
Abstract: This study develops a novel model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, sudden stops, impatience and risk aversion are key determinants of maturity, both in our model and in the data.
9 citations
TL;DR: In this article, the optimal design of a partnership under the assumption that partners privately observe shocks to their liquidity needs is studied, and it is shown that if the initial ownership structure is such that one of the partners is too big to cheat but the other is not, the share of the initially larger partner ends up either reaching 100% (i.e., sole proprietorship forever) or decreasing to the point at which both partners are too big for cheating.
Abstract: Many economic activities are organized as partnerships. These ventures are formed with capital contributions by partnership members who obtain a share of ownership in exchange. The design of the partnership dictates how much of the profits is distributed among the members and how much is reinvested. In this paper, we study the optimal design of partnerships under the assumption that partners privately observe shocks to their liquidity needs. When the ownership share of a partner is large enough, his incentives to misreport vanish. This occurs because a fraction of the increase in his payouts after reporting high liquidity needs is financed by disinvesting in the partnership. When his ownership share is not big enough, the ownership structure of the partnership must vary over time to prevent misreporting. The limiting distribution of shares depends on the initial ownership structure. Under certain conditions, if the partnership starts with approximately equally distributed shares, both partners are too big to cheat and the ownership structure remains unchanged forever. Instead, if the initial ownership structure is such that one of the partners is too big to cheat but the other is not, the share of the initially larger partner ends up either reaching 100% (i.e., sole proprietorship forever) or decreasing to the point at which both partners are too big to cheat (i.e., shares are approximately equally distributed forever).
6 citations
TL;DR: The authors measured the relative roles of bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession and found that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both.
Abstract: In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment. By contrast, informal default through delinquency rose sharply. In the subsequent recovery, households have been widely viewed as "deleveraging" (Mian and Su2011, Krugman and Eggertson 2012) via the largest reduction of unsecured debt seen in the past three decades. We measure the relative roles of recent bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession. Our results suggest that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both.
5 citations
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TL;DR: For years, perhaps even decades, Japan's economy has struggled with low growth and low inflation, and a year ago, new policies were put into place to turn around the economy as discussed by the authors.
Abstract: For years, perhaps even decades, Japan’s economy has struggled with low growth and low inflation. A year ago, new policies were put into place to turn around the economy. Although there are similarities between Japan’s experience and that of other developed countries (including the U.S.), there are also many differences.
4 citations
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TL;DR: This paper found that U.S. households started a deleveraging process as soon as the Great Recession began, which was in late 2007, and continued along this path until mid-2010.
Abstract: U.S. households started a deleveraging process as soon as the Great Recession began, which was in late 2007. They continued along this path until mid-2010. Among the different types of consumer debt (auto loans, credit card, student loans), this trend of paying down debt was particularly striking for credit card debt. Research on the reasons behind this trend is ongoing.1 The increased risk during the crisis could have motivated financial institutions to extend
3 citations
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TL;DR: In this paper, the role of bankruptcy reform and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default was investigated, and it was shown that bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies.
Abstract: In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as “develeraging” (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have “worked.” We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate.
3 citations
TL;DR: In this article, the decline in the number of cardholders in delinquency and number of accounts per cardholder in delinquencies are primary factors affecting the fall in the delinquency rate.
Abstract: The decline in the number of cardholders in delinquency and the number of accounts per cardholder in delinquency are primary factors affecting the fall in the delinquency rate.
2 citations
TL;DR: This article developed a model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle.
Abstract: This study develops a novel model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, sudden stops, impatience and risk aversion are key determinants of maturity, both in our model and in the data.
TL;DR: While households decreased credit card debt between 2007 and 2010, the process varied by education level between the extensive margin (how many households borrowed) and the intensive margin(how much households borrowed).
Abstract: While households decreased credit card debt between 2007 and 2010, the process varied by education level between the extensive margin (how many households borrowed) and the intensive margin (how much households borrowed).