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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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Citations

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Cited by:
  1. 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.
  2. repec:iza:izadps:dp1805 is not listed on IDEAS
  3. 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.).
  4. 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.
  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. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  7. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  8. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  9. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.
  10. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
  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. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.
  13. Thomas Hintermaier & Winfried Koeniger, 2009. "Debt Portfolios," Working Papers 646, Queen Mary, University of London, School of Economics and Finance.
  14. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, 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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