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Unsecured debt with public insurance : from bad to worse

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  • Kartik B. Athreya
  • Nicole B. Simpson

Abstract

In U.S. data, income interruptions, the receipt of public insurance, and the incidence of personal bankruptcy are all closely related. The central contribution of this paper is to evaluate both bankruptcy protection and public insurance in a unified setting where each program alters incentives in the other. Specifically, we explicitly allow for distortion created by the default option and public insurance to affect 1) risk-taking, 2) borrowing, and 3) search effort. Our analysis delivers two striking conclusions. First, we find that U.S. personal bankruptcy law is an important barrier to allowing the public insurance system to improve welfare. Second, contrary to popular belief, we find that increases in the generosity of public insurance will lead to more, not less, bankruptcy.

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  • Kartik B. Athreya & Nicole B. Simpson, 2004. "Unsecured debt with public insurance : from bad to worse," Working Paper 03-14, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:03-14
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    Cited by:

    1. Halket, Jonathan R, 2012. "Existence of an equilibrium in incomplete markets with discrete choices and many markets," Economics Discussion Papers 2875, University of Essex, Department of Economics.
    2. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    3. Borys Grochulski, 2007. "Optimal Personal Bankruptcy Design: A Mirrlees Approach," 2007 Meeting Papers 1008, Society for Economic Dynamics.
    4. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," NBER Working Papers 22846, National Bureau of Economic Research, Inc.
    5. repec:esx:essedp:711 is not listed on IDEAS
    6. Athreya, Kartik, 2006. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2051-2079, November.
    7. Kyle Herkenhoff, 2014. "The Impact of Consumer Credit Access on Unemployment," 2014 Meeting Papers 448, Society for Economic Dynamics.
    8. repec:ces:ifodic:v:13:y:2016:i:4:p:19191579 is not listed on IDEAS
    9. Daphne Chen & Jake Zhao, 2017. "The Impact of Personal Bankruptcy on Labor Supply Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 40-61, October.
    10. Charles Grant & Winfried Koeniger, 2009. "Redistributive Taxation and Personal Bankruptcy in U.S. States," Journal of Law and Economics, University of Chicago Press, vol. 52(3), pages 445-467, August.
    11. Mankart, Jochen & Rodano, Giacomo, 2015. "Personal bankruptcy law, debt portfolios, and entrepreneurship," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 157-172.
    12. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 0910, Economics Division, School of Social Sciences, University of Southampton.
    13. Jeffrey Traczynski, 2016. "Personal Bankruptcy and Social Insurance," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 23-27, 02.
    14. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.
    15. Mateos-Planas, Xavier & Seccia, Giulio, 2006. "Welfare implications of endogenous credit limits with bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2081-2115, November.
    16. Carroll, Daniel R. & Dolmas, James & Young, Eric R., 2015. "Majority Voting: A Quantitative Investigation," Working Paper 1442, Federal Reserve Bank of Cleveland.
    17. Mateos-Planas, Xavier, 2009. "A model of credit limits and bankruptcy with applications to welfare and indebtedness," Discussion Paper Series In Economics And Econometrics 910, Economics Division, School of Social Sciences, University of Southampton.
    18. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.
    19. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.
    20. Ionescu, Felicia, 2009. "Risky College Investment under Alternative Bankruptcy Regimes for Student Loans," Working Papers 2009-01, Department of Economics, Colgate University.
    21. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.

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    Keywords

    Bankruptcy ; Unemployment;

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