STRATEGIC OR NONSTRATEGIC: THE ROLE OF FINANCIAL BENEFIT IN BANKRUPTCY

Shuoxun Zhang, Tarun Sabarwal and Li Gan ()

Economic Inquiry, 2015, vol. 53, issue 2, 1004-1018

Abstract: type="main" xml:id="ecin12163-abs-0001"> A partial test for strategic behavior in bankruptcy filing may be formulated by testing whether consumers manipulate their debt and filing decision jointly, or not: that is, testing for endogeneity of financial benefit and the bankruptcy filing decision. Using joint maximum likelihood estimation of an extended discrete choice model, test results are consistent with nonstrategic filing: financial benefit is exogenous to the filing decision. This result is confirmed in two different datasets (Panel Study of Income Dynamics and Survey of Consumer Finances). This result is consistent with an ex ante low net gain from a bankruptcy filing; a type of “rational inattention” to rare events such as bankruptcy . ( JEL D12, D14)

Date: 2015
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Working Paper: Strategic or Non-Strategic: The Role of Financial Benefit in Bankruptcy (2014)
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