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Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection

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  • Marina Pavan

    ()
    (Boston College)

Abstract

This paper estimates a dynamic model of durable and non-durable consumption choice and default behavior in an economy where risky borrowing is allowed and bankruptcy protection is regulated by law. I exploit the substantial difference in the generosity of bankruptcy exemptions across the U.S. states to assess the role of durable goods as both informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The model accounts for the equilibrium effects of bankruptcy protection on both consumer saving behavior and the credit market. In addition to providing reasonable estimates of the discount rate and risk aversion, I find that the generosity of bankruptcy protection does change both the incentives and the ability of households to accumulate durable wealth. The more generous the bankruptcy regulation, the lower the net durable wealth held by households in the first half of the lifecycle before retirement. In order to minimize the default rate bankruptcy protection should be removed. The optimal level of exemption is positive but low.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 573.

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Length: 59 pages
Date of creation: 01 Jun 2003
Date of revision: 01 May 2005
Handle: RePEc:boc:bocoec:573

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Keywords: durable goods; saving; personal bankruptcy; structural estimation;

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References

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  20. Yaz Terajima & Cesaire Meh, 2005. "Housing, Personal Bankruptcy, Entrepreneurship," Computing in Economics and Finance 2005 415, Society for Computational Economics.
  21. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.
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Citations

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Cited by:
  1. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.
  2. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
  3. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
  4. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  5. 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.
  6. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
  7. 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.).
  8. Hintermaier, Thomas & Koeniger, Winfried, 2011. "Debt Portfolios," IZA Discussion Papers 5653, Institute for the Study of Labor (IZA).
  9. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.
  10. Mankart, Jochen, 2014. "The (Un-) importance of Chapter 7 wealth exemption levels," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 1-16.
  11. 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.
  12. Hanno Lustig & Stijn Van Nieuwerburgh, 2004. "How Much Does Household Collateral Constrain Regional Risk Sharing?," NBER Working Papers 10505, National Bureau of Economic Research, Inc.
  13. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  14. repec:iza:izadps:dp1805 is not listed on IDEAS
  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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