How many shocks are calculated for the following years?

The authors then estimate the shocks for the following three years using the regression results: sjk = $1, 745 + 0.23s j−1 k + e j k, where the errors ek are drawn from the empirical distribution of errors.

What is the average interest rate for unsecured debt?

This low default rate, together with the fact that creditors can garnish wages of bankrupts for more than one period, means that in effect almost all debt is recovered, leading to an average interest rate that is only slightly higher than the risk-free rate.

How many years of work would a household allocate to working?

χ is chosen so that a household with average productivity and labor endowment would choose to allocate 40 percent of its time to working.

What is the average debt-to-income ratio for a bankrupt?

Warren, and Westbrook (2000) report an average debt-to-income ratio of 2.8 for bankrupts in 1997, compared to an overall ratio of 0.8.

How much is the debt-to-income ratio in a bankrupt household?

On average, bankrupt households are 30-50% poorer than the average household, which means that they are still well above poverty level.

What are the penalties for bankrupts during the default period?

In addition to losing the seized income specified in the bankruptcy rule, bankrupt debtors face two further punishments during the default period.

What is the value of a bond under fresh start with wage garnishment?

The bond price under fresh start with wage garnishment isqFS(d′, z, j) = (1− θ(d′, z, j))qb + θ(d′, z, j)E( Γ d′ + κ′ |I = 1)qb (4)where E( Γ d′+κ′ |I = 1) is the expected amount that will be garnished.

Open AccessJournal Article10.1257/AER.97.1.402

Consumer Bankruptcy: A Fresh Start

Igor Livshits, +2 more

- 01 Feb 2007

- The American Economic Review

- Vol. 97, Iss: 1, pp 402-418

534

TL;DR: In this article, a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty is presented, and the authors find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules.

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. (JEL D14, D91, K35)

AI Agents for this Paper

Find similar papers on Google Scholar, PubMed and Arxiv
Write a critical review of this paper
Analyze citations of this paper to find unaddressed research gaps

Most frequently asked questions

1. What is the effect of the lower level of uncertainty in Germany on welfare?

While the lower level of uncertainty in Germany reduces the value of insurance against shocks, the flatter life productivity profile reduces the costs of distorting intertemporal credit markets.

2. What is the value of a bond with zero default probability?

Without garnishment and with full discharge of debt, the zero profit condition is qb(d′, z, j) = (1− θ(d′, z, j))qb, where qb ( = 11+rs+τ) is the price of a bond with zero default probability.

3. Why do the authors exclude agents from the credit market for further periods?

The authors do not exclude agents from the credit market for any further periods, because, although bankruptcy shows up on a consumer’s credit report for 10 years, many banks specialize in lending to former bankrupts, and therefore the exclusion does not seem to be severe.

4. What is the effect of the reversal in welfare rankings of FS and NFS?

The authors view this reversal in the welfare rankings of FS and NFS as suggesting that the variation in consumer bankruptcy law across countries may be linked to variations in the amount of uncertainty households face.

Figure 2. Private Bond Prices, Fresh Start Benchmark Economy, Generation 1

Table II Transition Probabilities (Households Head 25-49 in 1991)

Figure 1. Histogram of 5-year Medical Shocks as Fraction of Average Annual Income, Germany and USA

Figure 3. Private Bond Prices, No Fresh Start Benchmark Economy, Generation 1

Citations

Consumer bankruptcy: are allegations of abuse well

Diann Carol, +1 more

- 01 Jan 2006

Repository•10.2139/ssrn.5030329

Wealth Protection in Bankruptcy and Serial Entrepreneurship

Donghyun Kang

- 01 Jan 2024

- Social Science Research Network

•Posted Content

The Spice of Life: Allowing for Heterogeneity in Macro Models

Kartik Athreya, +1 more

- 01 Jan 2012

- Richmond Fed Economic Brief

TL;DR: For example, this paper argued that simplifying assumptions that suppress differences between people can enrich analysis of both observed data and policy tradeoffs, sometimes significantly altering economists' views and policy prescriptions.

...read moreread less

•Posted Content

Building Credit Histories with Competing Lenders

Igor Livshits, +2 more

- 01 Jan 2017

TL;DR: In this article, the authors modeled credit histories as a way of aggregating information among various potential lenders, and explicitly modeled how borrowers may affect this information aggregation through sequential borrowing, showing that despite dilution making early loans costly, borrowers may choose to take on small, early loans to signal their creditworthiness to other lenders.

...read moreread less

Forbearance vs. Interest Rates: Experimental Tests of Liquidity and Strategic Default Triggers *

Deniz Duru Aydin

TL;DR: This article used the random assignment of debt relief policies in a large-scale experiment to test default models emphasizing liquidity and strategic behavior, finding that borrowers respond differently to a dollar reduction in current payments when delivered through forbearance or interest rate reduction: forbearance reduces payments twice as much and delinquencies are more responsive to a rate reduction.

...read moreread less

...

Expand

References

Journal Article•10.1016/0169-2070(92)90130-2

American economic review: Gordon Leitch and J. Ernest Tanner, “Economic forecast evaluation: Profit versus the conventional error measures”, 81 (1991) 580–590

Robert Filders

- 01 Oct 1992

- International Journal of Forecasting

15.3K

•Book

Statistical abstract of the United States

Domestic Commerce

- 01 Jan 1878

TL;DR: The Red River of the North basin of the Philippines was considered a part of the Louisiana Purchase by the United States Department of Commerce in the 1939 Census Atlas of the United Philippines as discussed by the authors.

...read moreread less

11.4K

•Journal Article•10.2307/2118417

Uninsured Idiosyncratic Risk and Aggregate Saving

S. Rao Aiyagari

- 01 Aug 1994

- Quarterly Journal of Economics

TL;DR: In this article, the authors present a qualitative and quantitative analysis of the standard growth model modified to include precautionary saving motives and liquidity constraints, and address the impact on the aggregate saving rate, the importance of asset trading to individuals, and the relative inequality of wealth and income distributions.

...read moreread less

3.3K

•Journal Article•10.1111/1468-0262.00269

Consumption Over the Life Cycle

Pierre-Olivier Gourinchas, +1 more

- 01 Jan 2002

- Econometrica

TL;DR: In this paper, a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty is proposed. But the model is not suitable for the general population.

...read moreread less

•Journal Article•10.2307/2298103

Debt-Constrained Asset Markets

Timothy J. Kehoe, +1 more

- 01 Oct 1993

- The Review of Economic Studies

TL;DR: In this paper, the authors develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature, where an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized.

...read moreread less

1.1K

...

Expand

Consumer Bankruptcy: A Fresh Start

Chat with Paper

AI Agents for this Paper

Most frequently asked questions

1. What is the effect of the lower level of uncertainty in Germany on welfare?

2. What is the value of a bond with zero default probability?

3. Why do the authors exclude agents from the credit market for further periods?

4. What is the effect of the reversal in welfare rankings of FS and NFS?

5. How many shocks are calculated for the following years?

6. What is the average interest rate for unsecured debt?

7. How many years of work would a household allocate to working?

8. What is the average debt-to-income ratio for a bankrupt?

9. How much is the debt-to-income ratio in a bankrupt household?

10. What are the penalties for bankrupts during the default period?

11. What is the value of a bond under fresh start with wage garnishment?

Figures

Citations

Consumer bankruptcy: are allegations of abuse well

Wealth Protection in Bankruptcy and Serial Entrepreneurship

The Spice of Life: Allowing for Heterogeneity in Macro Models

Building Credit Histories with Competing Lenders

Forbearance vs. Interest Rates: Experimental Tests of Liquidity and Strategic Default Triggers *

References

American economic review: Gordon Leitch and J. Ernest Tanner, “Economic forecast evaluation: Profit versus the conventional error measures”, 81 (1991) 580–590

Statistical abstract of the United States

Uninsured Idiosyncratic Risk and Aggregate Saving

Consumption Over the Life Cycle

Debt-Constrained Asset Markets

Related Papers (5)

Uninsured Idiosyncratic Risk and Aggregate Saving

The Household Bankruptcy Decision

Debt with Potential Repudiation: Theoretical and Empirical Analysis

An Empirical Analysis of Personal Bankruptcy and Delinquency

Default Risk and Income Fluctuations in Emerging Economies