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Bankruptcy, Credit Constraints, and Insurance: Some Empirics

  • Charles Grant

    ()

    (University College London and CSEF, University of Salerno)

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    Bankruptcy acts as insurance if the decision to default is negatively correlated with income shocks. However, whether bankruptcy provides insurance is dependent on the punishment for default. Such rules can instead cause the consumer to be credit constrained. If debts are not fully enforceable, then a rational lender may limit how much debt any borrower will be allowed to hold. This limit will be higher if the punishment for defaulting on the debt is increased. The US provides a natural test of the theory since rules about which assets may be kept by the debtor, the state exemptions, when filing for bankruptcy differ dramatically across the different states. This paper shows that increasing the level of these exemptions causes less debt to be held by consumers, and offers an explanation for the differing ability of consumers to smooth consumption.

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    File URL: http://www.csef.it/WP/wp40.pdf
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    Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 40.

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    Date of creation: 01 May 2000
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    Handle: RePEc:sef:csefwp:40
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    1. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
    2. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
    3. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
    4. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
    5. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
    6. Orazio P. Attanasio & Martin Browning, 1993. "Consumption over the Life Cycle and over the Business Cycle," NBER Working Papers 4453, National Bureau of Economic Research, Inc.
    7. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    8. Dirk Krueger & Fabrizio Perri, 1999. "Risk sharing: private insurance markets or redistributive taxes?," Staff Report 262, Federal Reserve Bank of Minneapolis.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
    11. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
    12. Richard Hines & Jeremy Berkowitz, 1998. "Bankruptcy exemptions and the market for mortgage loans," Finance and Economics Discussion Series 1998-07, Board of Governors of the Federal Reserve System (U.S.).
    13. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
    14. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
    15. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
    16. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
    17. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, October.
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