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Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

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  • Eva-Maria Steiger

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Abstract

Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer’s incentives prior to distress and during a ’period of good conduct’ following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor’s choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.

Suggested Citation

  • 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.
  • Handle: RePEc:esi:discus:2006-17
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    File URL: ftp://papers.econ.mpg.de/esi/discussionpapers/2006-17.pdf
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    References listed on IDEAS

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    1. Wang, Hung-Jen & White, Michelle J, 2000. "An Optimal Personal Bankruptcy Procedure and Proposed Reforms," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 255-286, January.
    2. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
    3. 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.
    4. Song Han & Wenli Li, 2004. "Fresh start or head start? The effect of filing for personal bankruptcy on the labor supply," Finance and Economics Discussion Series 2004-28, Board of Governors of the Federal Reserve System (U.S.).
    5. Christoph Zaborowski & Peter Zweifel, 1999. "Getting Out of Debt: Garnishment of Wage in Whose Interest?," European Journal of Law and Economics, Springer, vol. 8(3), pages 207-230, November.
    6. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 381-409, Fall.
    7. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
    8. Michel A. Robe & Eva-Maria Steiger & Pierre-Armand Michel, 2006. "Penalties and Optimality in Financial Contracts: Taking Stock," SFB 649 Discussion Papers SFB649DP2006-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
    10. 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.
    11. Rea, Samuel A, Jr, 1984. "Arm-breaking, Consumer Credit and Personal Bankruptcy," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 188-208, April.
    12. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-830, October.
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    More about this item

    Keywords

    Personal Bankruptcy; Limited Liability; Moral Hazard; Law & Economics;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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