Consumption Smoothing and Debtor Protections

Nathaniel Pattison

No 1703, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: Protections for debtors are a significant source of consumption insurance. This paper evaluates the insurance created by laws that protect defaulting debtors’ assets. First, I show that households are not fully insured; consumption declines by 3-5% upon default. Second, I estimate the effect of changes in asset protection on the default rate, repayment in default, and interest rates. While additional protection does smooth consumption, the default distortion generates a substantial interest rate cost. Within a sufficient statistics formula, the estimates imply that less asset protection would significantly increase welfare.

Keywords: Social Insurance; Household Finance; Bankruptcy; Debt Collection; Borrowing (search for similar items in EconPapers)
JEL-codes: D14 H10 K35 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Consumption smoothing and debtor protections (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:smu:ecowpa:1703

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