Faculty Publications - School of Business

Document Type

Article

Publication Date

1995

Abstract

The value of the option to default on unsecured credit contracts is estimated and found to be significantly impacted by state and federal laws governing creditors' collection practices and bankruptcy. The data suggest that the expected value of the option to default influences debtors' choices in default and is correlated with their use of their credit cards before default. Cardholders who use their lines of credit very intensely before default are significantly more likely to make choices in default which allow them to realize a greater benefit from default. Furthermore, these results offer a possible explanation for consumers' seeming insensitivity to interest rates charged on revolving lines of credit.

Comments

Originally published in Financial Services Review, 4(2) Fall 1995.

http://academyfinancial.org/financial-services-review/

Included in

Business Commons

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