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Assessing bankruptcy reform in a model with temptation and equilibrium default

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  • Nakajima, Makoto

Abstract

A life-cycle model with equilibrium default in which agents with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform. The calibrated model indicates that the 2005 reform reduces bankruptcies, as seen in the data, and improves welfare, as lower default premia allows better consumption smoothing. A counterfactual reform of changing income garnishment rate is also investigated. Interesting contrasting welfare effects between two types of agents emerge. Agents with temptation prefer a lower garnishment rate as tighter borrowing constraint prevents them from over-borrowing, while those without prefer better consumption smoothing enabled by a higher garnishment rate.

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  • Nakajima, Makoto, 2017. "Assessing bankruptcy reform in a model with temptation and equilibrium default," Journal of Public Economics, Elsevier, vol. 145(C), pages 42-64.
  • Handle: RePEc:eee:pubeco:v:145:y:2017:i:c:p:42-64
    DOI: 10.1016/j.jpubeco.2016.11.002
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    Cited by:

    1. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2020. "The Economic Consequences of Bankruptcy Reform," Working Papers 2020-164, Becker Friedman Institute for Research In Economics.
    2. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    3. Greg Kaplan & Giovanni L. Violante, 2021. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Working Papers 2021-9, Princeton University. Economics Department..
    4. Bechlioulis, Alexandros P. & Brissimis, Sophocles N., 2019. "Consumer debt non-payment and the borrowing constraint: Implications for consumer behavior," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 161-172.
    5. Youngsoo Jang & Soyoung Lee, 2021. "A Generalized Endogenous Grid Method for Default Risk Models," Staff Working Papers 21-11, Bank of Canada.
    6. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2019. "The Economic Consequences of Bankruptcy Reform," NBER Working Papers 26254, National Bureau of Economic Research, Inc.
    7. Exler, Florian & Hansak, Alexander, 2021. "Naïve Consumers and Financial Mistakes," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242359, Verein für Socialpolitik / German Economic Association.
    8. Chatterjee, Satyajit & Eyigungor, Burcu, 2019. "Endogenous political turnover and fluctuations in sovereign default risk," Journal of International Economics, Elsevier, vol. 117(C), pages 37-50.
    9. Alexandros P. Bechlioulis & Sophocles N. Brissimis, 2021. "Are household consumption decisions affected by past due unsecured debt? Theory and evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3040-3053, April.
    10. Schlafmann, Kathrin, 2016. "Housing, Mortgages, and Self Control," CEPR Discussion Papers 11589, C.E.P.R. Discussion Papers.
    11. Roettger, Joost, 2019. "Discretionary monetary and fiscal policy with endogenous sovereign risk," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 44-66.
    12. Gajendran Raveendranathan & Georgios Stefanidis, 2022. "Designing “Win-Win” Rate Caps," Department of Economics Working Papers 2022-03, McMaster University.
    13. Marek Vochozka & Jaromir Vrbka & Petr Suler, 2020. "Bankruptcy or Success? The Effective Prediction of a Company’s Financial Development Using LSTM," Sustainability, MDPI, vol. 12(18), pages 1-17, September.

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    More about this item

    Keywords

    Consumer bankruptcy; Debt; Default; Borrowing constraint; Temptation and self-control; Hyperbolic discounting; Heterogeneous agents; Incomplete markets;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - 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

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