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Accounting for the Rise in Consumer Bankruptcies

  • Igor Livshits

    (The University of Western Ontario)

  • James MacGee

    (The University of Western Ontario)

  • Michele Tertilt

    ()

    (Economics Department, Stanford University)

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, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in 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 Stanford Institute for Economic Policy Research in its series Discussion Papers with number 06-001.

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Date of creation: Sep 2006
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Handle: RePEc:sip:dpaper:06-001
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