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American Economic Review: Vol. 97 No. 1 (March 2007)

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Consumer Bankruptcy: A Fresh Start

Article Citation

Livshits, Igor, James MacGee, and Michèle Tertilt. 2007. "Consumer Bankruptcy: A Fresh Start." American Economic Review, 97(1): 402-418.

DOI: 10.1257/aer.97.1.402

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)

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Authors

Livshits, Igor
MacGee, James
Tertilt, Michèle


American Economic Review



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