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Consumer durables and risky borrowing: The effects of bankruptcy protection

  • Pavan, Marina

There exist substantial differences in the generosity of bankruptcy protection across U.S. states. This paper exploits cross-state variation in exemption levels to assess the dual role of durable goods as informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The generosity of bankruptcy protection is found to change both the incentives and the ability of households to accumulate durable wealth. The gains from a high level of insurance are reduced by the effect of tighter credit constraints, so that the net effects of a change in exemption are very small. A more generous bankruptcy regulation reduces net durable wealth in the first half of the life cycle. In addition, the optimal level of exemption is positive but low.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 8 (November)
Pages: 1441-1456

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Handle: RePEc:eee:moneco:v:55:y:2008:i:8:p:1441-1456
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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