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Consumer Bankruptcy: A Fresh Start

Author

Listed:
  • Igor Livshits

    (University of Western Ontario)

  • James MacGee

    (University of Western Ontario)

  • Michele Tertilt

    (Stanford University)

Abstract
There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one’s debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules – while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

Suggested Citation

  • Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:04-011
    as

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    File URL: http://www-siepr.stanford.edu/repec/sip/04-011.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Consumer Bankruptcy; Fresh Start; Life Cycle;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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