Consumer Bankruptcy: A Fresh Start

Igor Livshits, James (Jim) MacGee () and Michele Tertilt

No 04-011, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one’s debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules – while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

Keywords: Consumer Bankruptcy; Fresh Start; Life Cycle (search for similar items in EconPapers)
JEL-codes: E21 E49 G18 K35 (search for similar items in EconPapers)
Date: 2005-04
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Consumer Bankruptcy: A Fresh Start (2007)
Working Paper: Consumer bankruptcy: a fresh start (2003)
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