Defaulting on consumer debt leads to limited insurance and unequal consumption.
The article explores how consumer debt default affects economies with complete markets. Households can partially default on debt, leading to only partial insurance. Risk-based pricing makes full insurance too expensive, resulting in limited trade in securities. Changes in income affect consumption, debt, and default rates positively. Unlike previous studies, there are no restrictions on the types of securities issued. Limited trade occurs without debt constraints that prevent default. This research offers new insights into consumption inequality.