Regulating Consumer Bankruptcy: A Theoretical Inquiry

Barry Adler, Ben Polak and Alan Schwartz

Yale School of Management Working Papers from Yale School of Management

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: (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 p

Date: 1999-11-01, Revised 2000-07-01
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