Research

Working Papers:

Creditor Rights and Household Debt Renegotiation: Evidence from Unsecured Debt (Job Market Paper), June 2023

Abstract: Renegotiation with creditors provides distressed households an alternative to incurring the adverse effects of declaring bankruptcy. This paper examines how creditor rights in bankruptcy influence the decision to renegotiate outstanding debt. Through a stylized model, I show that when creditor rights are weak, lenders are more willing to renegotiate their debt contracts to avoid bankruptcy costs. Conversely, borrowers have low incentives to renegotiate when creditors have weak claims in bankruptcy. To address the endogenous nature of this two-sided bargaining, I exploit a legal change in 2020 that increased all borrowers' willingness to accept renegotiation contracts. I use this shock to identify lenders' demand for renegotiation. Using a comprehensive data set from an online lender and state-level exemptions that protect household assets in bankruptcy to measure creditor rights, I establish that the lender significantly increases their willingness to renegotiate when their rights are weaker in bankruptcy. These findings carry important implications for bankruptcy design, as renegotiation is a crucial alternative for distressed households.

Can Credit Rating Affect Credit Risk?  Causal Evidence from an Online Lending Marketplace (with Amiyatosh Purnanandam), January 2023

Presentations: Western Finance Association (2023), Community Banking Research Conference, Federal Reserve Bank, St. Louis (2023), Consumer Behavior in Credit and Payment Markets, Federal Reserve Bank, Philadelphia (2023)

Abstract: Credit rating is determined by credit risk, but can the rating in itself change a borrower’s credit risk in an economically meaningful manner? Despite the theoretical and practical importance of this question, there is limited empirical evidence on this topic since obtaining variation in credit rating independent of a borrower’s underlying fundamentals is difficult. Using a regulatory change in March 2020 that provides a credibly exogenous variation in the credit ratings of household borrowers, we show that individuals with negative rating shock default at a 23 percentage point higher rate than otherwise identical borrowers in the year following the negative shock. Our findings suggest that empirical studies linking credit ratings to real outcomes should carefully consider the endogenous effect of ratings on future outcomes. These findings also show frequent erroneous credit bureau data incidents impose economically significant long-term consumer costs.

Other Works in Progress:

Are U.S. Intermediary Capital Regulations Hurting Risk Sharing? Evidence from Catastrophe Bonds