Assessing bankruptcy reform in a model with temptation and equilibrium default

Makoto Nakajima ()

No 15-12, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: A life-cycle model with equilibrium default in which consumers with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform and other counterfactual reforms. The calibrated model indicates that the 2005 bankruptcy reform achieves its goal of reducing the number of bankruptcy filings, as seen in the data, but at the cost of loss in social welfare. The creditor-friendly reform provides borrowers with a stronger commitment to repay and thus yields lower default premia and better consumption smoothing. However, those who borrow and default due to temptation or unavoidable large expenditures suffer more under the reform due to higher costs or means-testing requirement. Moreover, those who borrow due to temptation suffer from overborrowing when the borrowing cost declines. The model indicates that the negative welfare effects dominate.

Keywords: Consumer bankruptcy; Debt; Default; Borrowing constraint; Temptation and self-control; Hyperbolic discounting; Heterogeneous agents; Incomplete markets (search for similar items in EconPapers)
JEL-codes: D91 E21 E44 G18 K35 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-03-09
New Economics Papers: this item is included in nep-dge, nep-law and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Assessing bankruptcy reform in a model with temptation and equilibrium default (2017)
Working Paper: Assessing Bankruptcy Reform in a Model with Temptation and Equilibrium Default (2016)
Working Paper: Assessing Bankruptcy Reform in a Model with Temptation and Equilibrium Default (2016)
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