Regulating Consumer Bankruptcy: A Theoretical Inquiry
AbstractThis 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 InfoArticle provided by University of Chicago Press in its journal Journal of Legal Studies.
Volume (Year): 29 (2000)
Issue (Month): 2 (June)
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Web page: http://www.journals.uchicago.edu/JLS/
Other versions of this item:
- Barry Adler & Ben Polak & Alan Schwartz, 1999. "Regulating Consumer Bankruptcy: A Theoretical Inquiry," Yale School of Management Working Papers ysm128, Yale School of Management, revised 01 Jul 2000.
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- 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.
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- 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.
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