Consumer Bankruptcy: A Fresh Start

Authors: Livshits, Igor; MacGee, James; Tertilt, Miche`le

Source: The American Economic Review, Volume 97, Number 1, March 2007 , pp. 402-418(17)

Publisher: American Economic Association

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Abstract:

Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values.

Document Type: Short communication

DOI: http://dx.doi.org/10.1257/000282807780323514

Publication date: 2007-03-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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