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The IT Revolution and the Unsecured Credit Market

The information technology (IT) revolution coincided with the transformation of the U.S. unsecured credit market. From 1983 to 2004 households' unsecured borrowing increased rapidly and there was a even faster increase in the number of bankruptcy filings. To study the effect of information costs on debt and bankruptcy a risk of repu- diation model with asymmetric information and costly screening is introduced. When information costs are high, the design of contracts under private information prevents some households from borrowing with risk of default. As information costs drop, house- holds borrow more and the number of bankruptcy lings increase. A calibrated version of the model reproduces the main characteristics of the U.S. unsecured credit market in 1983 and 2004. Quantitative exercises suggest that the IT revolution may have played an important role in the transformation of the unsecured credit market.

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