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Fresh start or head start? The effect of filing for personal bankruptcy on the labor supply

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Author Info
Song Han
Wenli Li

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Abstract

The key feature of the modern U.S. personal bankruptcy law is to provide debtors a financial fresh start through debt discharge. The primary justification for the discharge policy is to preserve human capital by maintaining incentives for work. In this paper, we test this fresh start argument by providing the first estimate of the effect of personal bankruptcy filing on the labor supply using data from the Panel Study of Income Dynamics (PSID). Our econometric approach controls for the endogenous self-selection of bankruptcy filing and allows for dependence over time for the same household. We find that filing for bankruptcy does not have a positive impact on annual hours worked by bankrupt households, a result mainly due to the wealth effects of debt discharge. The finding is robust to a number of alternative model specifications and sample selections. Therefore, our analysis does not find supporting evidence for the human capital argument for bankruptcy discharge.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 04-5.

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Date of creation: 2004
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Handle: RePEc:fip:fedpwp:04-5

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Keywords: Bankruptcy

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  1. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2005. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 05-18, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
  4. Tullio Jappelli & Jörn-Steffen Pischke & Nicholas S. Souleles, 1998. "Testing For Liquidity Constraints In Euler Equations With Complementary Data Sources," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 251-262, May. [Downloadable!] (restricted)
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  5. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
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  6. Robert Moffitt, 2002. "Welfare Programs and Labor Supply," NBER Working Papers 9168, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
  8. Alan B. Krueger & Bruce D. Meyer, 2002. "Labor Supply Effects of Social Insurance," NBER Working Papers 9014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Loretta Mester, 2002. "Is the personal bankruptcy system bankrupt?," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 31-44. [Downloadable!]
  10. Buckley, F H & Brinig, Margaret F, 1998. "The Bankruptcy Puzzle," Journal of Legal Studies, University of Chicago Press, vol. 27(1), pages 187-207, January.
  11. repec:fth:pennfi:69 is not listed on IDEAS
  12. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
  13. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
  14. Ruhm, Christopher J, 1997. "Is High School Employment Consumption or Investment?," Journal of Labor Economics, University of Chicago Press, vol. 15(4), pages 735-76, October. [Downloadable!] (restricted)
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  15. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September. [Downloadable!] (restricted)
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  1. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Discussion Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
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