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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. 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.
  2. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  3. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-93, April.
  4. Erzo F.P. Luttmer, 1999. "Group Loyalty and the Taste for Redistribution," Working Papers 9902, Harris School of Public Policy Studies, University of Chicago.
  5. Bramoullé, Yann & Djebbari, Habiba & Fortin, Bernard, 2009. "Identification of peer effects through social networks," Journal of Econometrics, Elsevier, vol. 150(1), pages 41-55, May.
  6. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  7. Marianne Bertrand & Erzo F.P. Luttmer & Sendhil Mullainathan, 1999. "Network Effects and Welfare Cultures," JCPR Working Papers 62, Northwestern University/University of Chicago Joint Center for Poverty Research.
  8. 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.
  9. Ethan Cohen-Cole & Giulio Zanella, 2008. "Unpacking Social Interactions," Economic Inquiry, Western Economic Association International, vol. 46(1), pages 19-24, 01.
  10. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
  11. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
  12. Ethan Cohen-Cole, 2008. "Credit card redlining," Risk and Policy Analysis Unit Working Paper QAU08-1, Federal Reserve Bank of Boston.
  13. 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.
  14. 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.
  15. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
  16. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
  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. 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.
  19. Kartik Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
  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. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  23. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
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