Risk Sharing and Incentives: Public Insurance Versus Bankruptcy Protection

Torben M Andersen, Joydeep Bhattacharya and Min Wang

No 20893, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This study compares public social insurance and consumer bankruptcy in a life-cycle model. Without moral hazard, public insurance dominates by providing superior consumption smoothing. However, with moral hazard, bankruptcy protection becomes optimal. Its exemption levels, priced into competitive credit contracts, internalize incentive distortions and can Pareto dominate public insurance. The two policies are strategic substitutes, offering little added benefit when combined. The key trade-off is between public insurance's better risk-sharing and bankruptcy's superior management of incentive problems.

Keywords: Endogenous; borrowing; constraints (search for similar items in EconPapers)
Date: 2025-12
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