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Regulating Consumer Bankruptcy: A Theoretical Inquiry

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  • Adler, Barry
  • Polak, Ben
  • Schwartz, Alan

Abstract

This paper uses a principal/agent framework to analyze consumer bankruptcy. The bankruptcy discharge partly insures risk-averse borrowers against bad income realizations but also reduces the borrower's incentive to avoid insolvency. Among our results are the following: (a) high bankruptcy exemptions increase bankruptcy insurance but at the cost of reducing the borrower's incentives to stay solvent; (b) reaffirmations--renegotiations--have ambiguous efficiency effects in general, but the right to renegotiate is especially valuable for relatively poor persons; (c) giving consumers the ex post choice regarding which bankruptcy chapter to use also provides more insurance but, by making bankruptcy softer on debtors, has poor incentive effects; and (d) serious consideration should be given to expanding the scope of consumers' ability to contract about bankruptcy because trade-offs between risk and incentives are context sensitive and, thus, are poorly made in statutes of general application. Copyright 2000 by the University of Chicago.

Suggested Citation

  • Adler, Barry & Polak, Ben & Schwartz, Alan, 2000. "Regulating Consumer Bankruptcy: A Theoretical Inquiry," The Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 585-613, June.
  • Handle: RePEc:ucp:jlstud:v:29:y:2000:i:2:p:585-613
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    File URL: http://dx.doi.org/10.1086/468086
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    References listed on IDEAS

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    1. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 217-251.
    2. Che, Yeon-Koo & Schwartz, Alan, 1999. "Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(2), pages 441-467, July.
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    Cited by:

    1. Iain Ramsay, 2012. "Between Neo-Liberalism and the Social Market: Approaches to Debt Adjustment and Consumer Insolvency in the EU," Journal of Consumer Policy, Springer, vol. 35(4), pages 421-441, December.
    2. Wei Fan & Michelle J. White, 2002. "Personal Bankruptcy and the Level of Entrepreneurial Activity," NBER Working Papers 9340, National Bureau of Economic Research, Inc.
    3. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
    4. Jochen Bigus & Eva-Maria Steiger, 2006. "When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings," European Journal of Law and Economics, Springer, vol. 22(3), pages 233-253, November.
    5. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
    6. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group.
    7. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
    8. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
    9. repec:spr:manint:v:52:y:2012:i:1:d:10.1007_s11575-011-0112-1 is not listed on IDEAS
    10. Michelle J. White, 2011. "Corporate and Personal Bankruptcy Law," NBER Working Papers 17237, National Bureau of Economic Research, Inc.

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