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Regulating Consumer Bankruptcy: A Theoretical Inquiry

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Author Info

  • Adler, Barry
  • Polak, Ben
  • Schwartz, Alan

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 the following: (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 poor persons; (c) giving consumers the ex post choice regarding which bankruptcy chapter to use also provides more insurance but, by making bankruptcy softer on debtors, has poor incentive effects; and (d) serious consideration should be given to expanding the scope of consumers' ability to contract about bankruptcy because trade-offs between risk and incentives are context sensitive and, thus, are poorly made in statutes of general application. Copyright 2000 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Legal Studies.

Volume (Year): 29 (2000)
Issue (Month): 2 (June)
Pages: 585-613

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Handle: RePEc:ucp:jlstud:v:29:y:2000:i:2:p:585-613

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Web page: http://www.journals.uchicago.edu/JLS/

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Cited by:
  1. Wei Fan & Michelle J. White, 2002. "Personal Bankruptcy and the Level of Entrepreneurial Activity," NBER Working Papers 9340, National Bureau of Economic Research, Inc.
  2. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
  4. 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.
  5. Michelle J. White, 2011. "Corporate and Personal Bankruptcy Law," NBER Working Papers 17237, National Bureau of Economic Research, Inc.
  6. Iain Ramsay, 2012. "Between Neo-Liberalism and the Social Market: Approaches to Debt Adjustment and Consumer Insolvency in the EU," Journal of Consumer Policy, Springer, vol. 35(4), pages 421-441, December.
  7. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
  8. 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.
  9. Jochen Bigus & Eva-Maria Steiger, 2006. "When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings," European Journal of Law and Economics, Springer, vol. 22(3), pages 233-253, November.

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