Accounting for the Rise in Consumer Bankruptcies
AbstractPersonal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
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Bibliographic InfoPaper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20066.
Date of creation: 2006
Date of revision:
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Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html
consumer bankruptcy; uncertainty; credit markets; stigma;
Other versions of this item:
- Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
- Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Accounting for the Rise in Consumer Bankruptcies," NBER Working Papers 13363, National Bureau of Economic Research, Inc.
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-BEC-2006-09-30 (Business Economics)
- NEP-DGE-2006-09-30 (Dynamic General Equilibrium)
- NEP-FIN-2006-09-30 (Finance)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-LAW-2006-09-30 (Law & Economics)
- NEP-MAC-2006-09-30 (Macroeconomics)
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