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Accounting for the Rise in Consumer Bankruptcies in the U.S. and Canada

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  • Igor Livshits
  • Jim MacGee

Abstract

Personal bankruptcy filings have increased dramatically: rising from 1.4 in per thousand of working age population 1970 to 8.5 in 2002 in the United States and from 0.2 in 1970 to 4.3 in 2002 in Canada. This paper asks whether 6 commonly mentioned potential explanations -- financial innovation, financial market liberalization, an increase in household specific idiosyncratic risk, demographic changes, legal changes and decreased “stigma†-- can quantitatively account for the rise in consumer bankruptcies in the United States and Canada. We use a heterogeneous agent life cycle model with competitive intermediaries who are able to (imperfectly) observe households (labor) productivity, age and current asset holdings. We undertake numerical experiments to determine the extent to which each of the 5 factors can account for the rise in consumer bankruptcies. Our analysis suggests that financial innovation (the spread of credit scoring and new collateralized debt instruments) and financial liberalization play an essential role, while demographic changes and increased earnings uncertainty play a small role in accounting for the rise. These results cast doubt on explanations of the rise which depend upon declining ``stigma'' explanation or the relaxation of the bankruptcy code

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 822.

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Date of creation: 2004
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Handle: RePEc:red:sed004:822

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Keywords: consumer bankruptcy; consumer credit.;

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