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Unsecured debt with public insurance : from bad to worse

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  • Kartik Athreya
  • Nicole B. Simpson

Abstract

In U.S. data, income interruptions, the receipt of public insurance, and the incidence of personal bankruptcy are all closely related. The central contribution of this paper is to evaluate both bankruptcy protection and public insurance in a unified setting where each program alters incentives in the other. Specifically, we explicitly allow for distortion created by the default option and public insurance to affect 1) risk-taking, 2) borrowing, and 3) search effort. Our analysis delivers two striking conclusions. First, we find that U.S. personal bankruptcy law is an important barrier to allowing the public insurance system to improve welfare. Second, contrary to popular belief, we find that increases in the generosity of public insurance will lead to more, not less, bankruptcy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 03-14.

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Date of creation: 2004
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Handle: RePEc:fip:fedrwp:03-14

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Keywords: Bankruptcy ; Unemployment;

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Citations

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Cited by:
  1. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
  2. Jose-Victor Rios-Rull & Xavier Mateos-Planas, 2009. "Credit Lines," 2009 Meeting Papers 894, Society for Economic Dynamics.
  3. 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.
  4. Song Han & Geng Li, 2009. "Household borrowing after personal bankruptcy," Finance and Economics Discussion Series 2009-17, Board of Governors of the Federal Reserve System (U.S.).
  5. 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.
  6. Ionescu, Felicia, 2009. "Risky College Investment under Alternative Bankruptcy Regimes for Student Loans," Working Papers 2009-01, Department of Economics, Colgate University.
  7. Borys Grochulski, 2008. "Optimal personal bankruptcy design : A Mirrlees approach," Working Paper 08-05, Federal Reserve Bank of Richmond.
  8. Jonathan Halket, 2012. "Existence of an equilibrium in incomplete markets with discrete choices and many markets," Economics Discussion Papers 711, University of Essex, Department of Economics.
  9. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.

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