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The macroeconomics of U.S. consumer bankruptcy choice : chapter 7 or chapter 13?

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  • Wenli Li
  • Pierre-Daniel G. Sarte

Abstract

Because of the recent surge in U.S. personal defaults, Congress is currently debating bankruptcy reform legislation requiring a means test for Chapter 7 filers. This paper explores the effects of such a reform in a model where, in contrast to previous work, bankruptcy options and production are explicitly taken into account. Our findings indicate that means testing would not improve upon current bankruptcy provisions and, at best, leaves aggregate filings, output, and welfare unchanged. Put simply,given already existing provisions, the introduction of an efficient means test would not bind. However, we do find that a tightening of existing bankruptcy laws, in the form of lower Chapter 7 asset exemptions, can be welfare improving. Contrary to previous studies, the analysis also suggests that eliminating bankruptcy entirely would cause significant declines in both output and welfare.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 02-01.

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Date of creation: 2002
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Handle: RePEc:fip:fedrwp:02-01

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Keywords: Bankruptcy;

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  16. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  17. Andreas Lehnert & Dean M. Maki, 2002. "Consumption, debt and portfolio choice: testing the effect of bankruptcy law," Finance and Economics Discussion Series 2002-14, Board of Governors of the Federal Reserve System (U.S.).
  18. Wang, H.J. & White, M., 1998. "An Optimal Personal Bankruptcy Procedure and Proposed Reform," Papers 98-07, Michigan - Center for Research on Economic & Social Theory.
  19. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
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  21. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  22. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
  23. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
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Cited by:
  1. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 0910, Economics Division, School of Social Sciences, University of Southampton.
  2. N. Narajabad, Borghan, 2010. "Information Technology and the Rise of Household Bankruptcy," MPRA Paper 21058, University Library of Munich, Germany.
  3. Kartik Athreya, 2005. "Equilibrium models of personal bankruptcy : a survey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 73-98.
  4. Simon Janßen & Uschi Backes-Gellner, 2009. "Skill Obsolescence, Vintage Effects and Changing Tasks," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 55(1), pages 83-103.
  5. Pavan, Marina, 2008. "Consumer durables and risky borrowing: The effects of bankruptcy protection," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1441-1456, November.

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