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Personal Bankruptcy: Reconciling Adverse Events and Strategic Filing Hypotheses Using Heterogeneity in Filing Types

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Author Info

  • Li Gan

    (Department of Economics, Texas A&M University)

  • Tarun Sabarwal

    (Department of Economics, University of Kansas)

  • Shuoxun Zhang

    (Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China)

Abstract

Personal bankruptcies have continued to rise even after passage of a comprehensive reform designed to curb strategic use of bankruptcy. We formalize a distinction between strategic filing and adverse events filing by testing whether consumers manipulate their debt and filing decision or not. Test results are consistent with the adverse events hypothesis and are replicated using both PSID and SCF data. Extending the analysis to allow for both types, there is evidence of heterogeneity in filing types, consistent with both hypotheses. On average, approximately 16 percent of households are more likely to behave as strategic types and 84 percent as adverse events types.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201239.

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Length: 42 pages
Date of creation: Oct 2012
Date of revision: Oct 2012
Handle: RePEc:kan:wpaper:201239

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Keywords: Consumer bankruptcy; personal bankruptcy; adverse events; strategic filing;

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  1. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2012. "Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates," NBER Working Papers 17807, National Bureau of Economic Research, Inc.
  2. Wise, David A. (ed.), 2005. "Analyses in the Economics of Aging," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226902869.
  3. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, vol. 99(1), pages 49-84, March.
  4. Mário R. Páscoa & Aloisio P. Araujo, 2002. "Bancruptcy in a model of unsecured claims," Economic Theory, Springer, vol. 20(3), pages 455-481.
  5. Li Gan & Roberto Mosquera, 2008. "An Empirical Study of the Credit Market with Unobserved Consumer Typers," NBER Working Papers 13873, National Bureau of Economic Research, Inc.
  6. Sabarwal Tarun, 2003. "Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-42, January.
  7. Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
  8. Arthur B. Kennickell & Martha Starr-McCluer & Brian J. Surette, 2000. "Recent changes in U. S. family finances: results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-29.
  9. Li Gan & Tarun Sabarwal, 2005. "A Simple Test of Adverse Events and Strategic Timing Theories of Consumer Bankruptcy," NBER Working Papers 11763, National Bureau of Economic Research, Inc.
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