Secured and Unsecured Debt in Household Portfolios

This research agenda aims to investigate the portfolio choice decisions of households with a focus on the coexistence of secured and unsecured debt. Secured debt is collateralized by holdings of durable goods. Unsecured debt is subject to default in case of bankruptcy. This research considers a variety of mechanisms that can rationalize the default decision, i.e., the decision to go bankrupt. Apart from individual rationality, any plausible model of unsecured debt needs to be consistent with equilibrium in financial markets. The latter is pinned down by expected default rates given the individual characteristics which are observable to banks. Within this framework, this project first studies which model of default is in line with observed portfolio holdings and default behavior. Second, this research quantitatively analyzes to what extent risk-sharing with defaultable debt is affected by bankruptcy regulations. Several aspects of bankruptcy regulation are relevant for this issue: Regulations affecting directly the individual default decision through the expected cost and benefit, and regulations referring to the constraints faced by the competitive financial sector. Finally, this approach allows for the assessment of the welfare properties of alternative bankruptcy regulations.