Optimal bankruptcy code: A fresh start for some
Journal of Economic Dynamics and Control, 2017, vol. 85, issue C, 123-149
What is the optimal consumer bankruptcy law? I answer this question using an incomplete markets life-cycle model with a planner who can choose state-contingent bankruptcy costs. I develop two main theoretical characterizations. First, whenever debt discharge is allowed, it should occur without cost. Second, bankruptcy should always be allowed for highly-indebted households. Quantitatively, the optimal policy can generate a welfare gain as large as 11.6%. However, attractive informal default, asymmetric information, and moral hazard can reduce the welfare gain to as little as 0.7%.
Keywords: Bankruptcy; Life-cycle models; Incomplete markets (search for similar items in EconPapers)
JEL-codes: D14 D52 D91 E21 K35 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:85:y:2017:i:c:p:123-149
Access Statistics for this article
Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok
More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().