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Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection

  • Marina Pavan

    ()

    (Boston College)

This paper estimates a dynamic model of durable and non-durable consumption choice and default behavior in an economy where risky borrowing is allowed and bankruptcy protection is regulated by law. I exploit the substantial difference in the generosity of bankruptcy exemptions across the U.S. states to assess the role of durable goods as both informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The model accounts for the equilibrium effects of bankruptcy protection on both consumer saving behavior and the credit market. In addition to providing reasonable estimates of the discount rate and risk aversion, I find that the generosity of bankruptcy protection does change both the incentives and the ability of households to accumulate durable wealth. The more generous the bankruptcy regulation, the lower the net durable wealth held by households in the first half of the lifecycle before retirement. In order to minimize the default rate bankruptcy protection should be removed. The optimal level of exemption is positive but low.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 573.

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Date of creation: 01 Jun 2003
Date of revision: 01 May 2005
Handle: RePEc:boc:bocoec:573
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