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Strategic or Non-Strategic: The Role of Financial Benefit in Bankruptcy

Author

Listed:
  • Li Gan

    (Department of Economics, Texas A&M University)

  • Tarun Sabarwal

    (Department of Economics, University of Kansas)

  • Shuoxun Zhang

    (Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China)

Abstract

A partial test for strategic behavior in bankruptcy filing may be formulated by testing whether consumers manipulate their debt and filing decision jointly, or not: that is, testing for endogeneity of financial benefit and the bankruptcy filing decision. Using joint maximum likelihood estimation of an extended discrete choice model, test results are consistent with non-strategic filing: financial benefit is exogenous to the filing decision. This result is confirmed in two different datasets (PSID and SCF). This result is consistent with an ex ante low net gain from a bankruptcy filing; a type of “rational inattention” to rare events such as bankruptcy.

Suggested Citation

  • Li Gan & Tarun Sabarwal & Shuoxun Zhang, 2014. "Strategic or Non-Strategic: The Role of Financial Benefit in Bankruptcy," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201402, University of Kansas, Department of Economics, revised Feb 2014.
    • Handle: RePEc:kan:wpaper:201402
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    File URL: http://www2.ku.edu/~kuwpaper/2014Papers/201402.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    2. Teeple, Keisuke, 2023. "Surprise and default in general equilibrium," Theoretical Economics, Econometric Society, vol. 18(4), November.
    3. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    4. Gan, Li & Hernandez, Manuel A. & Zhang, Shuoxun, 2021. "Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States," Economic Modelling, Elsevier, vol. 105(C).

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    More about this item

    Keywords

    Consumer bankruptcy; personal bankruptcy; adverse events; strategic filing;
    All these keywords.

    JEL classification:

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

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