American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Consumer Bankruptcy: A Fresh Start
American Economic Review
(pp. 402–418)
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)Citation
Livshits, Igor, James MacGee, and Michèle Tertilt. 2007. "Consumer Bankruptcy: A Fresh Start." American Economic Review 97 (1): 402–418. DOI: 10.1257/aer.97.1.402Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance