Consumption smoothing and debtor protections

Nathaniel Pattison

Journal of Public Economics, 2020, vol. 192, issue C

Abstract: Protections for defaulting debtors are a widely used form of consumption insurance. This paper evaluates the costs and benefits of this insurance, both inside and outside of bankruptcy. First, I show that consumption declines by 6% upon default, revealing a potential role for greater debtor protections to smooth consumption. Second, I use changes in states’ laws to estimate the impact of one type of debtor protection, asset exemptions, on repayment in default and interest rates. While higher exemptions smooth consumption by reducing collection in default, the interest rate cost is large relative to the benefits. Adapting a sufficient statistics formula from the literature, the estimates imply that the cost of additional exemption protection exceeds what debtors are willing to pay.

Keywords: Social insurance; Bankruptcy; Consumer credit; Consumption smoothing; Sufficient statistic (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Working Paper: Consumption Smoothing and Debtor Protections (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:192:y:2020:i:c:s0047272720301705

DOI: 10.1016/j.jpubeco.2020.104306

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