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Consumer Bankruptcy: A Fresh Start

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  • Igor Livshits

    ()
    (University of Western Ontario)

  • James MacGee

    (University of Western Ontario)

  • Michele Tertilt

    (Stanford University)

Abstract

There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one’s debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules – while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 04-011.

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Date of creation: Apr 2005
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Handle: RePEc:sip:dpaper:04-011

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Keywords: Consumer Bankruptcy; Fresh Start; Life Cycle;

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References

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  1. Alexopoulos, Michelle & Domowitz, Ian, 1998. "Personal Liabilities and Bankruptcy Reform: An International Perspective," International Finance, Wiley Blackwell, vol. 1(1), pages 127-59, October.
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  8. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  9. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  10. 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.
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  13. Marina Pavan, 2003. "Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection," Boston College Working Papers in Economics 573, Boston College Department of Economics, revised 01 May 2005.
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  16. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
  17. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  18. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  19. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
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