Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings
AbstractAmidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer’s incentives prior to distress and during a ’period of good conduct’ following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor’s choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.
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Bibliographic InfoPaper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2006-17.
Length: 31 pages
Date of creation: Sep 2006
Date of revision:
Find related papers by JEL classification:
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
This paper has been announced in the following NEP Reports:
- NEP-FIN-2006-09-23 (Finance)
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