Consumer Bankruptcy: A Fresh Start
Top Cited Papers
- 1 February 2007
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 97 (1) , 402-418
- https://doi.org/10.1257/aer.97.1.402
Abstract
Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35)Keywords
All Related Versions
This publication has 18 references indexed in Scilit:
- Borrowing Costs and the Demand for Equity over the Life CycleThe Review of Economics and Statistics, 2006
- Default and Punishment in General Equilibrium1Econometrica, 2005
- Welfare implications of the Bankruptcy Reform Act of 1999Journal of Monetary Economics, 2002
- The Household Bankruptcy DecisionAmerican Economic Review, 2002
- Determinants of the Consumer Bankruptcy DecisionThe Journal of Finance, 1999
- Personal Liabilities and Bankruptcy Reform: An International PerspectiveInternational Finance, 1998
- The nature of precautionary wealthJournal of Monetary Economics, 1997
- Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure SurveyJournal of Political Economy, 1995
- The Risk and Duration of Catastrophic Health Care ExpendituresThe Review of Economics and Statistics, 1994
- Uninsured Idiosyncratic Risk and Aggregate SavingThe Quarterly Journal of Economics, 1994