UC Santa Barbara

This dissertation consists of three essays on credit and the labor market. The first essays studies the aggregate, business cycle relationship between consumer credit and unemployment. Using micro-level data I show there is a consistent negative effect of unemployment on both a household's use of and access to consumer credit. I find that upon job loss, households increase applications for credit, get denied more frequently, and experience significant reductions in both debt outstanding and average monthly charges. I interpret these effects as an increase in credit constraints for the unemployed and examine how this relationship impacts macroeconomic variables over the business cycle.

To do so, I extend the canonical Mortensen and Pissarides (1994) model of unemployment to include a goods market with search and financial frictions. Households have limited commitment in repaying debt and face borrowing constraints that are disciplined by the ability of lenders to enforce financial contracts. The model predicts that job loss is followed by a contraction in borrowing constraints. In the aggregate, this channel leads to a strategic complementarity between (un)employment and firm hiring incentives as a higher fraction of unemployed consumers decreases the expected revenue from a labor match. I calibrate the model to match the estimated fall in credit upon job loss and examine how these individual unemployment-related credit shocks affect aggregate business cycles. I examine the response of unemployment to aggregate productivity and financial shocks. I find that productivity shocks do a poor job of generating the co-movement of credit and unemployment we observe in the data. However, I find that aggregate financial shocks contribute significantly to the observed dynamics of both real and financial variables.

The second essay, co-authored with Guillaume Rocheteau and Peter Rupert, studies the long-term, aggregate relationship between consumer credit and unemployment. The model is similar to that developed in Chapter 1, however, we depart from the assumption that households' borrowing constraints are driven by an enforcement technology and instead allow enforcement to arise endogenously based on lenders' ability to monitor household repayment. As a result borrowing limits are endogenous and depend on the sophistication of the financial system, the frequency of liquidity shocks, and the rate of return on (partially) liquid

assets that households can accumulate for self insurance. Moreover, firms'

expected productivity is endogenous and depends on firms' market power in

the goods market and the availability of unsecured credit to consumers. As a

result of the complementarity between credit and labor markets, multiple

steady states might exist. Across steady states unemployment and debt limits

are negatively correlated. We calibrate the model to the U.S. labor and credit markets

and illustrate the effects of an expansion in unsecured debt

similar to that seen in the U.S. from 1978 to 2008. Under the baseline

calibration, the rise in unsecured credit can account for approximately three quarters of the decline in the long-term average unemployment rate.

The third essay, co-authored with Tai-Wei Hu and Guillaume Rocheteau, studies the set of equilibria in a pure credit economy with limited commitment and endogenous debt limits, similar to that studied in Chapter 2. We show that the set of equilibria derived under

"not-too-tight" solvency constraints, as in Chapter 2, is of measure zero in the whole set of Perfect Bayesian Equilibria.

There exist a continuum of endogenous credit cycles of any periodicity and a

continuum of sunspot equilibria, irrespective of the assumed trading

mechanism. Moreover, any equilibrium allocation of the corresponding

monetary economy is an equilibrium allocation of the pure credit economy but

the reverse is not true. On the normative side, we establish conditions

under which constrained-efficient allocations cannot be implemented with

"not-too-tight" solvency constraints.