Bankruptcy, Credit Constraints, and Insurance: Some Empirics

Charles Grant ()
Additional contact information
Charles Grant: University College London and CSEF, University of Salerno

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Bankruptcy acts as insurance if the decision to default is negatively correlated with income shocks. However, whether bankruptcy provides insurance is dependent on the punishment for default. Such rules can instead cause the consumer to be credit constrained. If debts are not fully enforceable, then a rational lender may limit how much debt any borrower will be allowed to hold. This limit will be higher if the punishment for defaulting on the debt is increased. The US provides a natural test of the theory since rules about which assets may be kept by the debtor, the state exemptions, when filing for bankruptcy differ dramatically across the different states. This paper shows that increasing the level of these exemptions causes less debt to be held by consumers, and offers an explanation for the differing ability of consumers to smooth consumption.

Keywords: Bankruptcy; Consumer Borrowing; Credit Constraints (search for similar items in EconPapers)
JEL-codes: D91 (search for similar items in EconPapers)
Date: 2000-05-01
New Economics Papers: this item is included in nep-cba and nep-ias
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.csef.it/WP/wp40.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:40

Access Statistics for this paper

More papers in CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy Contact information at EDIRC.
Bibliographic data for series maintained by Dr. Maria Carannante ().