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Optimal bankruptcy code: A fresh start for some

Grey Gordon

Journal of Economic Dynamics and Control, 2017, vol. 85, issue C, 123-149

Abstract: 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)
Date: 2017
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:85:y:2017:i:c:p:123-149