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Household bankruptcy decision: the role of social stigma vs. information sharing

  • Ethan Cohen-Cole
  • Burcu Duygan-Bump

Using a large sample of individual credit information provided by a US credit bureau, this paper investigates the empirical relevance of stigma and information sharing on household bankruptcy and its trend. Many observers of bankruptcy patterns have conjectured that there exists an increased willingness to default that reflects a diminution of social stigma. In this paper, we use a new methodology to disentangle stigma and social learning—two acknowledgedly important social factors affecting default. Although our results indicate a large and important role for stigma, changes in information costs seem to be the more relevant factor in explaining the observed bankruptcy trends. Furthermore, we show that this aggregate trend disguises enormous heterogeneity. While social factors appear quite important among the very poor and less educated, stigma seems to have increased and information costs to have decreased among these very groups. On the contrary, we show that it is primarily among the relatively rich and well educated that stigma has declined. These compositional findings further suggest that the overall increase in the bankruptcy rates cannot be explained by a decrease in social stigma. We argue that the secular increase in bankruptcy is more likely attributable to decreased information costs rather than to changes in social stigma.

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Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU08-6.

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Date of creation: 2008
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Handle: RePEc:fip:fedbqu:qau08-6
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  1. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
  2. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
  3. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
  4. Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
  5. Kartik Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
  6. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
  7. Sendhil Mullainathan & Marianne Bertrand & Erzo F.P. Luttmer, 1998. "Network Effects and Welfare Cultures," Working papers 98-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Yann Bramoullé & Habiba Djebbari & Bernard Fortin, 2007. "Identification of Peer Effects through Social Networks," Cahiers de recherche 0705, CIRPEE.
  9. Erzo F.P. Luttmer, 1999. "Group Loyalty and the Taste for Redistribution," JCPR Working Papers 61, Northwestern University/University of Chicago Joint Center for Poverty Research.
  10. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
  11. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
  12. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  13. David B. Gross & Nicholas S. Souleles, 1999. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Center for Financial Institutions Working Papers 98-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  14. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
  15. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
  16. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
  17. Giulio Zanella, 2007. "Discrete Choice with Social Interactions and Endogenous Memberships," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 122-153, 03.
  18. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  19. Ethan Cohen-Cole, 2008. "Credit card redlining," Risk and Policy Analysis Unit Working Paper QAU08-1, Federal Reserve Bank of Boston.
  20. Giulio Zanella, 2004. "Discrete Choice with Social Interactions and Endogenous Memberships," Department of Economics University of Siena 442, Department of Economics, University of Siena.
  21. Ethan Cohen-Cole & Giulio Zanella, 2008. "Welfare Stigma or Information Sharing? Decomposing Social Interactions Effects in Social Benefit Use," Department of Economics University of Siena 531, Department of Economics, University of Siena.
  22. Ethan Cohen-Cole & Giulio Zanella, 2007. "Unpacking social interactions," Risk and Policy Analysis Unit Working Paper QAU07-4, Federal Reserve Bank of Boston.
  23. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
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