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Consumption Smoothing and Debtor Protections

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  • Nathaniel Pattison

    (Southern Methodist University)

Abstract

Protections for debtors are a significant source of consumption insurance. This paper evaluates the insurance created by laws that protect defaulting debtors’ assets. First, I show that households are not fully insured; consumption declines by 3-5% upon default. Second, I estimate the effect of changes in asset protection on the default rate, repayment in default, and interest rates. While additional protection does smooth consumption, the default distortion generates a substantial interest rate cost. Within a sufficient statistics formula, the estimates imply that less asset protection would significantly increase welfare.

Suggested Citation

  • Nathaniel Pattison, 2017. "Consumption Smoothing and Debtor Protections," Departmental Working Papers 1703, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1703
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    Cited by:

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    2. Montebruno, Piero & Silva, Olmo & Szumilo, Nikodem, 2021. "Judge Dread: court severity, repossession risk and demand in mortgage and housing markets," LSE Research Online Documents on Economics 114435, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Social Insurance; Household Finance; Bankruptcy; Debt Collection; Borrowing;
    All these keywords.

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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