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Proximity to Help Matters: The Effect of Access to Centers of Legal Aid on Bankruptcy Rates

Author

Listed:
  • Kristina Hrehova
  • Stefan Domonkos

Abstract

Personal bankruptcy aims to provide a fresh start to debtors. While bankruptcy is often the only solution to financial distress, large spatial distance to affordable legal services may result in its underuse by eligible debtors. Using a large administrative dataset of personal bankruptcies, we study the impact of spatial distance from public Centers for Legal Aid (CLAs) on the regional incidence of personal bankruptcy in Slovakia. We avoid endogeneity by focusing on the increased availability of legal aid controlling for the expected distance from the nearest CLA, which serves as the first contact point in the process of filing for personal bankruptcy in the Slovak Republic. Distance from these legal aid centers has a significant impact on personal bankruptcy rates: the closer the nearest CLA is, the larger the prevalence of personal bankruptcy is in a given municipality. We quantify the impact of service access on personal bankruptcy rates, showing that improved access to free legal aid has both a statistically and substantively significant impact on the use of personal bankruptcy by the public. At the end of the almost 3-year-long period analyzed, municipalities with good access to CLAs had 3.3 bankruptcies more per 1,000 inhabitants than municipalities with weak access to CLAs. This effect is significant, as the average national bankruptcy rate until December 2019 reached 6.3 bankruptcies per 1,000 persons.

Suggested Citation

  • Kristina Hrehova & Stefan Domonkos, 2022. "Proximity to Help Matters: The Effect of Access to Centers of Legal Aid on Bankruptcy Rates," CERGE-EI Working Papers wp728, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp728
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    References listed on IDEAS

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    1. Will Dobbie & Jae Song, 2015. "Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection," American Economic Review, American Economic Association, vol. 105(3), pages 1272-1311, March.
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    4. Hoai-Luu Q. Nguyen, 2019. "Are Credit Markets Still Local? Evidence from Bank Branch Closings," American Economic Journal: Applied Economics, American Economic Association, vol. 11(1), pages 1-32, January.
    5. Powell, James L., 1987. "Semiparametric Estimation Of Bivariate Latent Variable Models," SSRI Workshop Series 292689, University of Wisconsin-Madison, Social Systems Research Institute.
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    More about this item

    Keywords

    personal bankruptcy; insolvency; policy analysis; regional inequalities; spatial access; public services;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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