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Consumer durables and risky borrowing: The effects of bankruptcy protection

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  • Pavan, Marina

Abstract

There exist substantial differences in the generosity of bankruptcy protection across U.S. states. This paper exploits cross-state variation in exemption levels to assess the dual role of durable goods as informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The generosity of bankruptcy protection is found to change both the incentives and the ability of households to accumulate durable wealth. The gains from a high level of insurance are reduced by the effect of tighter credit constraints, so that the net effects of a change in exemption are very small. A more generous bankruptcy regulation reduces net durable wealth in the first half of the life cycle. In addition, the optimal level of exemption is positive but low.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 8 (November)
Pages: 1441-1456

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Handle: RePEc:eee:moneco:v:55:y:2008:i:8:p:1441-1456

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Bankruptcy Durable wealth Unsecured debt Saving;

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References

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  18. Wenli Li & Pierre-Daniel Sarte, 2003. "The macroeconomics of U.S. consumer bankruptcy choice: Chapter 7 or Chapter 13?," Working Papers 03-14, Federal Reserve Bank of Philadelphia.
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Citations

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Cited by:
  1. Jochen, Mankart, 2012. "The (Un-) importance of Chapter 7 wealth exemption levels," Economics Working Paper Series 1211, University of St. Gallen, School of Economics and Political Science, revised Sep 2013.
  2. Hintermaier, Thomas & Koeniger, Winfried, 2011. "Debt Portfolios," CEPR Discussion Papers 8359, C.E.P.R. Discussion Papers.
  3. Athreya, Kartik, 2006. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2051-2079, November.
  4. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.
  5. Benjamin J. Keys, 2010. "The credit market consequences of job displacement," Finance and Economics Discussion Series 2010-24, Board of Governors of the Federal Reserve System (U.S.).
  6. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  7. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
  8. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
  9. Hanno Lustig & Stijn Van Nieuwerburgh, 2010. "How Much Does Household Collateral Constrain Regional Risk Sharing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 265-294, April.
  10. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  11. repec:iza:izadps:dp1805 is not listed on IDEAS
  12. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
  13. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
  14. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.
  15. Theresa Kuchler & Johannes Stroebel, 2009. "Foreclosure and Bankruptcy--Policy Conclusions from the Current Crisis," Discussion Papers 08-037, Stanford Institute for Economic Policy Research.

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