00000nam 2200000zi 4500 9.894985 CaOODSP 20221107173910 m o d f cr cn||||||||| 201231t20202020onca ob f000 0 eng d CaOODSP eng rda CaOODSP n-us--- FB3-5/2020-57E-PDF Exler, Florian, 1986- author. Consumer credit with over-optimistic borrowers / by Florian Exler, Igor Livshits, James MacGee and Michèle Tertilt. Ottawa, Ontario, Canada : Bank of Canada = Banque du Canada, 2020. ©2020 1 online resource (ii, 52 pages) : colour illustrations. text txt rdacontent computer c rdamedia online resource cr rdacarrier Staff working paper = Document de travail du personnel, 1701-9397 ; 2020-57 "Last updated: December 29, 2020." Includes bibliographical references (pages 40-43). "There is active debate over whether borrowers' cognitive biases create a need for regulation to limit the misuse of credit. To tackle this question, we incorporate overoptimistic borrowers into an incomplete markets model with consumer bankruptcy. Lenders price loans, forming beliefs—type scores—about borrowers' types. Since over-optimistic borrowers face worse income risk but incorrectly believe they are rational, both types behave identically. This gives rise to a tractable theory of type scoring as lenders cannot screen borrower types. Since rationals default less often, the partial pooling of borrowers generates cross-subsidization whereby over-optimists face lower than actuarially fair interest rates. Over-optimists make financial mistakes: they borrow too much and default too late. We calibrate the model to the US and quantitatively evaluate several policies to address these frictions: reducing the cost of default, increasing borrowing costs, imposing debt limits, and providing financial literacy education. While some policies lower debt and filings, they do not reduce over-borrowing. Financial literacy education can eliminate financial mistakes, but it also reduces behavioral borrowers' welfare by ending cross-subsidization. Score-dependent borrowing limits can reduce financial mistakes but lower welfare"--Abstract, page ii. Consumer credit United States Econometric models. Credit control United States Econometric models. Bankruptcy United States Econometric models. Crédit à la consommation États-Unis Modèles économétriques. Crédit Politique gouvernementale États-Unis Modèles économétriques. Faillite États-Unis Modèles économétriques. Bank of Canada, issuing body. Staff working paper (Bank of Canada) 2020-57. (CaOODSP)9.806221 PDF 1.04 MB https://publications.gc.ca/collections/collection_2020/banque-bank-canada/FB3-5-2020-57-eng.pdf