Economic Theory

, Volume 56, Issue 3, pp 549–583 | Cite as

Consumer default with complete markets: default-based pricing and finite punishment

  • Xavier Mateos-PlanasEmail author
  • Giulio Seccia
Research Article


This paper studies economies with complete markets where there is positive default on consumer debt. In a simple tractable two-period model, households can default partially, at a finite punishment cost, and competitive intermediaries price loans of different sizes separately. This environment yields only partial insurance. The default-based pricing of debt makes it too costly for the borrower to achieve full insurance, and there is too little trade in securities. This framework is in contrast to existing literature. Unlike the literature with default, there are no restrictions on the set of state contingent securities that are issued. Unlike the literature on lack of commitment, limited trade arises without need of debt constraints that rule default out. Compared with the latter, the present approach appears to imply more consumption inequality. An extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general validity of this approach and its main implications.


Consumer default Complete markets Endogenous incomplete markets Risk-based pricing Risk sharing 

JEL Classification

E21 E44 D52 


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.School of Economics and FinanceQueen Mary University of LondonLondonUK
  2. 2.Economics, Social SciencesUniversity of SouthamptonSouthamptonUK

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