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Accounting for the Rise in Consumer Bankruptcies

  • Igor Livshits
  • James MacGee
  • Michèle Tertilt

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13363.

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Date of creation: Sep 2007
Date of revision:
Publication status: published as Igor Livshits & James MacGee & Michele Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-93, April.
Handle: RePEc:nbr:nberwo:13363
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