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Personal Bankruptcy: Reconciling Adverse Events and Strategic Timing Hypotheses Using Heterogeneity in Filing Types

Li Gan (), Tarun Sabarwal () and Shuoxun Zhang ()

No 201008, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: The strategic timing and adverse events hypotheses of personal bankruptcy have received particular attention. Existing research focuses on proving or disproving either hypothesis, using a strict interpretation of the role of financial benefit in the filing decision. Using a more realistic framework in which financial benefit may affect the filing decision in both hypotheses, we show that endogeneity of financial benefit is a distinguishing factor between the two hypotheses. Using two different datasets, we show that the endogeneity test favors the adverse events hypothesis. Extending the analysis to allow for both types, we find evidence of heterogeneity in filing types, consistent with both hypotheses. On average, approximately 16 percent of households are more likely to behave as strategic types and 84 percent as adverse events types. Several implications of these results are explored.

Keywords: Consumer bankruptcy; personal bankruptcy; adverse events; strategic timing (search for similar items in EconPapers)
JEL-codes: D12 D14 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-12, Revised 2011-05
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Working Paper: Personal Bankruptcy: Reconciling Adverse Events and Strategic Filing Hypotheses Using Heterogeneity in Filing Types (2012) Downloads
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