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Regulating Consumer Bankruptcy: A Theoretical Inquiry

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

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.

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Article provided by University of Chicago Press in its journal Journal of Legal Studies.

Volume (Year): 29 (2000)
Issue (Month): 2 (June)
Pages: 585-613

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Handle: RePEc:ucp:jlstud:v:29:y:2000:i:2:p:585-613
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  1. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
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