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Unsecured debt with public insurance : from bad to worse

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Author Info
Kartik Athreya
Nicole B. Simpson

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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 distortions 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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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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  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. Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 165-88, January. [Downloadable!] (restricted)
  4. P. Dubey & J. Geanakoplos & M . Shubik, . "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, SUNY-Stony Brook, Department of Economics. [Downloadable!]
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  5. Mikhail Golosov & Aleh Tsyvinski, 2003. "Designing Optimal Disability Insurance," Levine's Bibliography 506439000000000217, UCLA Department of Economics. [Downloadable!]
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  6. Kletzer, Lori G, 1998. "Job Displacement," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 115-36, Winter. [Downloadable!] (restricted)
  7. Rogerson, Richard & Schindler, Martin, 2002. "The welfare costs of worker displacement," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1213-1234, September. [Downloadable!] (restricted)
  8. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February. [Downloadable!] (restricted)
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  9. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September. [Downloadable!] (restricted)
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  10. Wang, Cheng & Williamson, Stephen D., 2002. "Moral Hazard, Optimal Unemployment Insurance and Experience Rating," Staff General Research Papers 10133, Iowa State University, Department of Economics.
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  11. Dynarski, Mark & Sheffrin, Steven M, 1987. "Consumption and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 411-28, May. [Downloadable!] (restricted)
  12. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June. [Downloadable!] (restricted)
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  13. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October. [Downloadable!] (restricted)
  14. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-64, December. [Downloadable!] (restricted)
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  15. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969. [Downloadable!] (restricted)
  16. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Blackwell Publishing, vol. 68(3), pages 523-42, July.
    Other versions:
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