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Consumption smoothing and debtor protections

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  • Pattison, Nathaniel

Abstract

Protections for defaulting debtors are a widely used form of consumption insurance. This paper evaluates the costs and benefits of this insurance, both inside and outside of bankruptcy. First, I show that consumption declines by 6% upon default, revealing a potential role for greater debtor protections to smooth consumption. Second, I use changes in states’ laws to estimate the impact of one type of debtor protection, asset exemptions, on repayment in default and interest rates. While higher exemptions smooth consumption by reducing collection in default, the interest rate cost is large relative to the benefits. Adapting a sufficient statistics formula from the literature, the estimates imply that the cost of additional exemption protection exceeds what debtors are willing to pay.

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  • Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:pubeco:v:192:y:2020:i:c:s0047272720301705
    DOI: 10.1016/j.jpubeco.2020.104306
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    2. Pattison, Nathaniel & Millimet, Daniel L., 2023. "A Tale of Two Bankruptcies: Geographic Differences in Bankruptcy Chapter Choice," IZA Discussion Papers 16105, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Social insurance; Bankruptcy; Consumer credit; Consumption smoothing; Sufficient statistic;
    All these keywords.

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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