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Strategic Or Nonstrategic: The Role Of Financial Benefit In Bankruptcy

Author

Listed:
  • Shuoxun Zhang
  • Tarun Sabarwal
  • Li Gan

Abstract

type="main" xml:id="ecin12163-abs-0001"> A partial test for strategic behavior in bankruptcy filing may be formulated by testing whether consumers manipulate their debt and filing decision jointly, or not: that is, testing for endogeneity of financial benefit and the bankruptcy filing decision. Using joint maximum likelihood estimation of an extended discrete choice model, test results are consistent with nonstrategic filing: financial benefit is exogenous to the filing decision. This result is confirmed in two different datasets (Panel Study of Income Dynamics and Survey of Consumer Finances). This result is consistent with an ex ante low net gain from a bankruptcy filing; a type of “rational inattention” to rare events such as bankruptcy . ( JEL D12, D14)

Suggested Citation

  • Shuoxun Zhang & Tarun Sabarwal & Li Gan, 2015. "Strategic Or Nonstrategic: The Role Of Financial Benefit In Bankruptcy," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1004-1018, April.
    • Handle: RePEc:bla:ecinqu:v:53:y:2015:i:2:p:1004-1018
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    File URL: http://hdl.handle.net/10.1111/ecin.2015.53.issue-2
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    Cited by:

    1. Jairaj Gupta & Mariachiara Barzotto & André Aroldo Freitas De Moura, 2024. "Bankruptcy Resolution: Misery or Strategy," Abacus, Accounting Foundation, University of Sydney, vol. 60(3), pages 665-708, September.
    2. Gan, Li & Hernandez, Manuel A. & Zhang, Shuoxun, 2021. "Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States," Economic Modelling, Elsevier, vol. 105(C).
    3. Teeple, Keisuke, 2023. "Surprise and default in general equilibrium," Theoretical Economics, Econometric Society, vol. 18(4), November.
    4. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    5. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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