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Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

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Author Info
Eva-Maria Steiger ()

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Abstract

Amidst 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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Publisher Info
Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Discussion Papers on Strategic Interaction with number 2006-17.

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Length: 31 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:esi:discus:2006-17

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Related research
Keywords: Personal Bankruptcy Limited Liability Moral Hazard Law & Economics

Find related papers by JEL classification:
D18 - Microeconomics - - Household Behavior - - - Consumer Protection
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer 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

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References listed on IDEAS
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  1. Adler, Barry & Polak, Ben & Schwartz, Alan, 2000. "Regulating Consumer Bankruptcy: A Theoretical Inquiry," Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 585-613, June.
    Other versions:
  2. Jochen Bigus & Eva-Maria Steiger, 2006. "When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings," European Journal of Law and Economics, Springer, vol. 22(3), pages 233-253, November. [Downloadable!] (restricted)
  3. Song Han & Wenli Li, 2004. "Fresh start or head start? The effect of filing for personal bankruptcy on the labor supply," Working Papers 04-5, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  4. Wang, Hung-Jen & White, Michelle J, 2000. "An Optimal Personal Bankruptcy Procedure and Proposed Reforms," Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 255-86, January.
    Other versions:
  5. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
    Other versions:
  6. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Michel A. Robe & Eva-Maria Steiger & Pierre-Armand Michel, 2006. "Penalties and Optimality in Financial Contracts: Taking Stock," SFB 649 Discussion Papers SFB649DP2006-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  8. Christoph Zaborowski & Peter Zweifel, 1999. "Getting Out of Debt: Garnishment of Wage in Whose Interest?," European Journal of Law and Economics, Springer, vol. 8(3), pages 207-230, November. [Downloadable!] (restricted)
  9. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October. [Downloadable!] (restricted)
  10. Rea, Samuel A, Jr, 1984. "Arm-breaking, Consumer Credit and Personal Bankruptcy," Economic Inquiry, Oxford University Press, vol. 22(2), pages 188-208, April.
  11. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law & Economics, University of Chicago Press, vol. 42(2), pages 809-30, October.
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