Optimal Personal Bankruptcy Design under Moral Hazard
In this paper, we develop a normative theory of unsecured consumer credit and personal bankruptcy based on the optimal trade-off between incentives and insurance. First, in order to characterize this trade-off, we solve a dynamic moral hazard problem in which agents' private effort decisions influence the life-cycle profiles of their earnings. We then show how the optimal allocation of individual effort and consumption can be implemented in a market equilibrium in which (i) agents and intermediaries repeatedly trade in secured and unsecured debt instruments, and (ii) agents obtain (restricted) discharge of their unsecured debts in bankruptcy. The structure of this equilibrium and the associated restrictions on debt discharge closely match the main qualitative features of personal credit markets and bankruptcy law that actually exist in the United States. (Copyright: Elsevier)
Volume (Year): 13 (2010)
Issue (Month): 2 (April)
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Timothy J. Kehoe & David K. Levine, 2006.
"Bankruptcy and Collateral in Debt Constrained Markets,"
NBER Working Papers
12656, National Bureau of Economic Research, Inc.
- Timothy J. Kehoe & David K. Levine, 2008. "Â Bankruptcy and Collateral in Debt Constrained Markets," Chapters, in: Macroeconomics in the Small and the Large, chapter 5 Edward Elgar Publishing.
- Timothy J. Kehoe & David K. Levine, 2006. "Bankruptcy and collateral in debt constrained markets," Staff Report 380, Federal Reserve Bank of Minneapolis.
- Albanesi, Stefania & Sleet, Christopher, 2003.
"Dynamic Optimal Taxation with Private Information,"
CEPR Discussion Papers
4006, C.E.P.R. Discussion Papers.
- Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
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