Income Contingent Loans: Toward a Piecewise Linear Scheme

Abstract

This chapter sets up a simple framework for the analysis of income contingent loans, under adverse selection and moral hazard. Economic agents face credit constraints, and consumption smoothing is not perfect when the interest rate on borrowing is higher than that on lending. An income contingent loan scheme contributes toward consumption smoothing across states of nature (or individual types) within any period, as well as across periods. We argue in favour of a scheme of piecewise linear income-dependent repayment rates. This is a dynamic generalization of the scheme of piecewise linear income taxation that Apps, Long and Rees (2011) investigated in a static setting.KeywordsMoral HazardAdverse SelectionFinancial AssetSocial Welfare FunctionStudent LoanThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.