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Consumer Bankruptcy: A Fresh Start

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Author Info

  • Igor Livshits
  • James MacGee
  • Mich�le Tertilt

Abstract

Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.1.402
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File URL: http://www.aeaweb.org/aer/data/mar07/20030636_data.zip
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 402-418

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:402-418

Note: DOI: 10.1257/aer.97.1.402
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  1. Attanasio, O. & Weber, G., 1995. "Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  2. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
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  17. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2000. "Default in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 1247, Cowles Foundation for Research in Economics, Yale University.
  18. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
  19. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014.
  20. Fernández-Villaverde, Jesús & Krueger, Dirk, 2011. "Consumption And Saving Over The Life Cycle: How Important Are Consumer Durables?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(05), pages 725-770, November.
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