Skip to main content

The Persistence of Financial Distress

System Working Paper 17-33 | Published December 28, 2017

Download PDF

Authors

Kartik Athreya Federal Reserve Bank of Richmond

José Mustre-del-Río Federal Reserve Bank of Kansas City

Juan M. Sánchez Federal Reserve Bank of St. Louis

The Persistence of Financial Distress

Abstract

Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.