Regulating Consumer Bankruptcy: A Theoretical Inquiry

Barry Adler, Ben Polak and Alan Schwartz

The Journal of Legal Studies, 2000, vol. 29, issue 2, 585-613

Abstract: This paper uses a principal/agent framework to analyze consumer bankruptcy. The bankruptcy discharge partly insures risk-averse borrowers against bad income realizations but also reduces the borrower's incentive to avoid insolvency. Among our results are the following: (a) high bankruptcy exemptions increase bankruptcy insurance but at the cost of reducing the borrower's incentives to stay solvent; (b) reaffirmations--renegotiations--have ambiguous efficiency effects in general, but the right to renegotiate is especially valuable for relatively poor persons; (c) giving consumers the ex post choice regarding which bankruptcy chapter to use also provides more insurance but, by making bankruptcy softer on debtors, has poor incentive effects; and (d) serious consideration should be given to expanding the scope of consumers' ability to contract about bankruptcy because trade-offs between risk and incentives are context sensitive and, thus, are poorly made in statutes of general application. Copyright 2000 by the University of Chicago.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlstud:v:29:y:2000:i:2:p:585-613

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