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Bankruptcy, Credit Constraints, and Insurance: Some Empirics

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  • Charles Grant

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    (University College London and CSEF, University of Salerno)

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    Abstract

    Bankruptcy acts as insurance if the decision to default is negatively correlated with income shocks. However, whether bankruptcy provides insurance is dependent on the punishment for default. Such rules can instead cause the consumer to be credit constrained. If debts are not fully enforceable, then a rational lender may limit how much debt any borrower will be allowed to hold. This limit will be higher if the punishment for defaulting on the debt is increased. The US provides a natural test of the theory since rules about which assets may be kept by the debtor, the state exemptions, when filing for bankruptcy differ dramatically across the different states. This paper shows that increasing the level of these exemptions causes less debt to be held by consumers, and offers an explanation for the differing ability of consumers to smooth consumption.

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    Bibliographic Info

    Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 40.

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    Date of creation: 01 May 2000
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    Handle: RePEc:sef:csefwp:40

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    Keywords: Bankruptcy; Consumer Borrowing; Credit Constraints;

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    1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    2. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, octubre-d.
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    4. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
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    6. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
    7. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
    8. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
    9. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
    10. Richard Hines & Jeremy Berkowitz, 1998. "Bankruptcy exemptions and the market for mortgage loans," Finance and Economics Discussion Series 1998-07, Board of Governors of the Federal Reserve System (U.S.).
    11. Dirk Krueger & Fabrizio Perri, 1999. "Risk sharing: private insurance markets or redistributive taxes?," Staff Report 262, Federal Reserve Bank of Minneapolis.
    12. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
    13. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
    14. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
    15. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    16. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
    17. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
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