Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection

Marina Pavan

No 573, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper estimates a dynamic model of durable and non-durable consumption choice and default behavior in an economy where risky borrowing is allowed and bankruptcy protection is regulated by law. I exploit the substantial difference in the generosity of bankruptcy exemptions across the U.S. states to assess the role of durable goods as both informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The model accounts for the equilibrium effects of bankruptcy protection on both consumer saving behavior and the credit market. In addition to providing reasonable estimates of the discount rate and risk aversion, I find that the generosity of bankruptcy protection does change both the incentives and the ability of households to accumulate durable wealth. The more generous the bankruptcy regulation, the lower the net durable wealth held by households in the first half of the lifecycle before retirement. In order to minimize the default rate bankruptcy protection should be removed. The optimal level of exemption is positive but low.

Keywords: durable goods; saving; personal bankruptcy; structural estimation (search for similar items in EconPapers)
JEL-codes: C13 D12 E21 K35 (search for similar items in EconPapers)
Date: 2003-06-01, Revised 2005-05-01
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (9)

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Journal Article: Consumer durables and risky borrowing: The effects of bankruptcy protection (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:573

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