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Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States

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  • Gan, Li
  • Hernandez, Manuel A.
  • Zhang, Shuoxun

Abstract

Consumer bankruptcy can serve as insurance against large financial shocks but may also provide an opportunity for deliberate use. This paper proposes and implements a model to test for the coexistence of heterogeneous filing behaviors in the bankruptcy decision. We identify two filing behaviors using data from the United States. One group can be associated with individuals who do not intend to deliberately use the bankruptcy law in the absence of an adverse event, while the second group is more consistent with a “strategic” behavior that exhibits a higher filing probability and financial benefit from filing. The larger prevalence of the first group supports the insurance function of bankruptcy. We further show that the model can help to better identify eventual filers compared to standard models that do not allow for different filing behaviors. The proposed model can be easily extended to assess heterogeneous behaviors in credit and insurance markets.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:ecmode:v:105:y:2021:i:c:s0264999321002625
    DOI: 10.1016/j.econmod.2021.105673
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous filing behavior; Consumer bankruptcy; Financial gain; Debt manipulation;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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