Advanced Search
MyIDEAS: Login

Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://fmwww.bc.edu/EC-P/wp573.pdf
File Function: main text
Download Restriction: no

Bibliographic Info

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

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

Contact details of provider:
Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
Email:
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 07-16, Federal Reserve Bank of Philadelphia.
  2. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  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. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  5. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-90, May.
  6. 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.
  7. 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.
  8. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-72, November.
  9. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  10. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
  11. David B. Gross & Nicholas S. Souleles, 1999. "What caused the recent increase in bankruptcy and delinquency: stigma or risk-composition?," Proceedings 649, Federal Reserve Bank of Chicago.
  12. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  13. 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.
  14. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  15. 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.
  16. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
  17. Peter Rupert & Richard Rogerson & Randall Wright, 1994. "Estimating substitution elasticities in household production models," Staff Report 186, Federal Reserve Bank of Minneapolis.
  18. S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information 9705005, EconWPA.
  19. Jesus Fernandez-Villaverde & Dirk Krueger, 2004. "Consumption and Saving over the Life Cycle: How Important are Consumer Durables?," 2004 Meeting Papers 357b, Society for Economic Dynamics.
  20. Yaz Terajima & Cesaire Meh, 2005. "Housing, Personal Bankruptcy, Entrepreneurship," Computing in Economics and Finance 2005 415, Society for Computational Economics.
  21. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  22. William R. Zame, 1992. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 673, UCLA Department of Economics.
  23. Robert M. Sauer & Michael P. Keane, 2004. "A Computationally Practical Simulation Estimation Algorithm for Dynamic Panel Data Models with Unobserved Endogenous State Variables," Econometric Society 2004 North American Summer Meetings 136, Econometric Society.
  24. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-30, October.
  25. Igor Livshits & James MacGee & Mich�le Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
  26. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  27. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
  28. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
  29. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  30. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  2. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.
  3. Igor Livshits & James MacGee & Mich�le Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
  4. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
  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. 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.
  7. Thomas Hintermaier & Winfried Koeniger, 2009. "Debt Portfolios," Working Papers 646, Queen Mary, University of London, School of Economics and Finance.
  8. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
  9. Theresa Kuchler & Johannes Stroebel, 2009. "Foreclosure and Bankruptcy--Policy Conclusions from the Current Crisis," Discussion Papers 08-037, Stanford Institute for Economic Policy Research.
  10. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  11. 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.
  12. 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.
  13. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.
  14. 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.).
  15. repec:iza:izadps:dp1805 is not listed on IDEAS

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:573. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.