IDEAS home Printed from https://ideas.repec.org/p/fgv/epgewp/615.html
   My bibliography  Save this paper

How much debtors' punishment?

Author

Listed:
  • Araújo, Aloísio Pessoa de
  • Funchal, Bruno

Abstract

This paper investigates how the bankruptcy exemptions applied by the Personal Bankruptcy Law in each American state a§ect the aggregated level of individuals and small businessesí loans. Higher levels of bankruptcy exemptions imply in a lenient rule, motivating debtors to Öle for bankruptcy, what makes lenders worsen the terms of credit. On the other hand, lower levels of exemptions imply in a harsh punishment to debtors, inhibiting their demand for credit fearing a possible bankruptcy by bad luck. ConÖrming the theoretical claims, empirical tests show the existence of a non-monotonic shape in the relationship between the bankruptcy exemptions and the amount of credit to individuals and small businesses, where the optimal level of exemptions should be neither too high nor too low. Since the majority of the states in U.S. do not apply the optimal level, an intervention that brings the exemption level closer to the optimal one can be credit and welfare enhancing.

Suggested Citation

  • Araújo, Aloísio Pessoa de & Funchal, Bruno, 2006. "How much debtors' punishment?," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 615, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:615
    as

    Download full text from publisher

    File URL: https://repositorio.fgv.br/bitstreams/8f2be4ca-3ea6-47bb-8de1-cfeceb56bbdb/download
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 841-879.
    2. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 217-251.
    3. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    4. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    5. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    6. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2005. "Default and Punishment in General Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 1-37, January.
    7. A. Araujo & M. R. Páscoa & P. K. Monteiro, 1997. "Incomplete markets, continuum of states and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(1), pages 205-213.
    8. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    9. Arturo Galindo, 2001. "Creditor Rights and the Credit Market: Where Do We Stand?," Research Department Publications 4259, Inter-American Development Bank, Research Department.
    10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    11. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    12. Arturo Galindo, 2001. "Creditor Rights and the Credit Market: Where Do We Stand?," Research Department Publications 4259, Inter-American Development Bank, Research Department.
    13. 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.
    14. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
    15. Dubey, Pradeep & Shubik, Martin, 1979. "Bankruptcy and optimality in a closed trading mass economy modelled as a non-cooperative game," Journal of Mathematical Economics, Elsevier, vol. 6(2), pages 115-134, July.
    16. Peterson, Richard L. & Aoki, Kiyomi, 1984. "Bankruptcy filings before and after implementation of the bankruptcy reform law," Journal of Economics and Business, Elsevier, vol. 36(1), pages 95-105, February.
    17. 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.
    18. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    19. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 14(2), pages 205-231, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2605-2642.
    2. Araújo, Fabio & Issler, João Victor & Fernandes, Marcelo, 2006. "A stochastic discount factor approach to asset pricing using panel data," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 628, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    3. Monteiro, Paulo Klinger, 2009. "First-price auction symmetric equilibria with a general distribution," Games and Economic Behavior, Elsevier, vol. 65(1), pages 256-269, January.
    4. Zhijie Xiao & Luiz Renato Lima, 2007. "Testing Covariance Stationarity," Econometric Reviews, Taylor & Francis Journals, vol. 26(6), pages 643-667.
    5. Flôres Junior, Renato Galvão, 2006. "The diversity of diversity: further methodological considerations on the use of the concept in cultural economics," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 626, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    6. Lima, Luiz Renato & Néri, Breno Pinheiro, 2007. "Comparing Value-at-Risk Methodologies," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 27(1), May.
    7. Renato G. Flôres & Maria Paula Fontoura & Rogério Guerra Santos, 2007. "Foreign Direct Investment Spillovers in Portugal: Additional Lessons from a Country Study," The European Journal of Development Research, Taylor and Francis Journals, vol. 19(3), pages 372-390.
    8. Aloisio Araujo & Bruno Funchal & Rafael Ferreira, 2010. "The Brazilian Bankruptcy Law Experiment," Fucape Working Papers 23, Fucape Business School.
    9. Funchal, Bruno, 2008. "The effects of the 2005 Bankruptcy Reform in Brazil," Economics Letters, Elsevier, vol. 101(1), pages 84-86, October.
    10. Lima, Luiz Renato & Gaglianone, Wagner Piazza & Sampaio, Raquel M.B., 2008. "Debt ceiling and fiscal sustainability in Brazil: A quantile autoregression approach," Journal of Development Economics, Elsevier, vol. 86(2), pages 313-335, June.
    11. Cavalcanti, Ricardo de Oliveira & Wallace, Neil, 2006. "New models of old(?) payment questions," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 619, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    12. Flôres Junior, Renato Galvão, 2006. "Dois ensaios sobre diversidade cultural e o comércio de serviços," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 622, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    13. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aloisio Araujo & Bruno Funchal, 2015. "How Much Should Debtors be Punished in Case of Default?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 229-245, April.
    2. Berger, Allen N. & Cerqueiro, Geraldo & Penas, María F., 2011. "Does debtor protection really protect debtors? Evidence from the small business credit market," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1843-1857, July.
    3. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
    4. Jeremy Berkowitz & Michelle J. White, 2002. "Bankruptcy and Small Firms' Access to Credit," NBER Working Papers 9010, National Bureau of Economic Research, Inc.
    5. Fu, Tong & Jian, Ze, 2018. "Property rights protection, financial access and corporate R&D: Evidence from a large representative sample of Chinese firms," Economic Systems, Elsevier, vol. 42(2), pages 332-345.
    6. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using bankruptcy to reduce foreclosures: does strip-down of mortgages affect the supply of mortgage credit?," Working Papers 14-35, Federal Reserve Bank of Philadelphia.
    7. Larissa Vieira Zamprogno & Jaime de Jesus Filho & Bruno Funchal, 2009. "Creditor Protection, Information Sharing and the Development of the Credit Market in the Mercosul Countries," Brazilian Business Review, Fucape Business School, vol. 6(3), pages 296-306, September.
    8. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    9. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Jevgenijs Steinbuks, 2008. "Financial constraints and firms' investment: results of a natural experiment measuring firm response to power interruption," Working Papers EPRG 0823, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    11. Geraldo Cerqueiro & María Fabiana Penas, 2017. "How Does Personal Bankruptcy Law Affect Startups?," The Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2523-2554.
    12. Razin, Assaf & Hale, Galina & Tong, Hui, 2006. "Institutional Weakness and Stock Price Volatility," CEPR Discussion Papers 5651, C.E.P.R. Discussion Papers.
    13. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    14. Benito Arruñada, 2011. "Mandatory accounting disclosure by small private companies," European Journal of Law and Economics, Springer, vol. 32(3), pages 377-413, December.
    15. Wenli Li & Ishani Tewari & Michelle J. White, 2019. "Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 59-87, February.
    16. Ang, James B., 2013. "Are modern financial systems shaped by state antiquity?," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4038-4058.
    17. Fedaseyeu, Viktar, 2020. "Debt collection agencies and the supply of consumer credit," Journal of Financial Economics, Elsevier, vol. 138(1), pages 193-221.
    18. Cerqueiro, G.M., 2009. "Information asymmetries, banking markets, and small business lending," Other publications TiSEM 6b448af8-d15e-4862-923f-2, Tilburg University, School of Economics and Management.
    19. Niinimäki, J-P., 2019. "Credit markets under asymmetric information regarding the law," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 380-390.
    20. Chomsisengphet, Souphala & Elul, Ronel, 2006. "Bankruptcy exemptions, credit history, and the mortgage market," Journal of Urban Economics, Elsevier, vol. 59(1), pages 171-188, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fgv:epgewp:615. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Núcleo de Computação da FGV EPGE (email available below). General contact details of provider: https://edirc.repec.org/data/epgvfbr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.