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Personal Bankruptcy: Reconciling Adverse Events and Strategic Timing Hypotheses Using Heterogeneity in Filing Types

Author

Listed:
  • Li Gan

    (Department of Economics, Texas A&M University)

  • Tarun Sabarwal

    (Department of Economics, University of Kansas)

  • Shuoxun Zhang

    (Department of Economics, Texas A&M University)

Abstract

The strategic timing and adverse events hypotheses of personal bankruptcy have received particular attention. Existing research focuses on proving or disproving either hypothesis, using a strict interpretation of the role of financial benefit in the filing decision. Using a more realistic framework in which financial benefit may affect the filing decision in both hypotheses, we show that endogeneity of financial benefit is a distinguishing factor between the two hypotheses. Using two different datasets, we show that the endogeneity test favors the adverse events hypothesis. Extending the analysis to allow for both types, we find evidence of heterogeneity in filing types, consistent with both hypotheses. On average, approximately 16 percent of households are more likely to behave as strategic types and 84 percent as adverse events types. Several implications of these results are explored.

Suggested Citation

  • Li Gan & Tarun Sabarwal & Shuoxun Zhang, 2010. "Personal Bankruptcy: Reconciling Adverse Events and Strategic Timing Hypotheses Using Heterogeneity in Filing Types," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201008, University of Kansas, Department of Economics, revised May 2011.
    • Handle: RePEc:kan:wpaper:201008
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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