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State bankruptcy laws and the responsiveness of credit card demand

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  • Dawsey, Amanda E.

Abstract

The responsiveness of credit demand to interest rate changes may vary widely by state due to differences in state bankruptcy and insolvency laws. Bankruptcy exemptions and other state laws insulate borrowers against negative consequences from non-repayment, and so lenient regulations may lead to decreased responsiveness to interest rate increases. Lenient laws also decrease creditors’ incentive to lend, and a resulting decrease in loan options will reinforce the inelasticity of credit demand. This paper presents a model that predicts (1) that credit demand is less responsive in states with borrower-friendly, lenient bankruptcy and insolvency laws, and (2) the effects of state laws on demand elasticity will be strongest among borrowers facing credit constraints. Using market experiment data from a large credit card issuer, this paper presents evidence that supports the hypothesis that demand responsiveness and insolvency law leniency are negatively related. Borrowers are more likely to continue using a card in states with lenient exemption and garnishment laws. Borrowers who take up less attractive offers are more likely to be credit constrained; among these borrowers, the impact of exemption laws is much stronger than among the unconstrained group.

Suggested Citation

  • Dawsey, Amanda E., 2015. "State bankruptcy laws and the responsiveness of credit card demand," Journal of Economics and Business, Elsevier, vol. 81(C), pages 54-76.
  • Handle: RePEc:eee:jebusi:v:81:y:2015:i:c:p:54-76 DOI: 10.1016/j.jeconbus.2015.06.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial policy; Bankruptcy; Credit market regulation; Credit cards;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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