Publication: Consumer Bankruptcy: A Fresh Start

All || By Area || By Year

Title Consumer Bankruptcy: A Fresh Start
Authors/Editors* Igor Livshits, James MacGee, Michele Tertilt
Where published* American Economic Review
How published* Journal
Year* 2007
Volume 97
Number 1
Pages 402-418
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.
Go to Computational Macroeconomics
Back to page 57 of list