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Consumer Bankruptcy, Mortgage Default and Labor Supply

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Abstract

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in both preferences and wage profiles. We also provide an evaluation of the BAPCPA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy.

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  • Wenli Li & Costas Meghir & Florian Oswald, 2022. "Consumer Bankruptcy, Mortgage Default and Labor Supply," Cowles Foundation Discussion Papers 2327, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2327
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    Cited by:

    1. 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).
    2. György Walter & Jens Valdemar Krenchel, 2021. "The Leniency of Personal Bankruptcy Regulations in the EU Countries," Risks, MDPI, vol. 9(9), pages 1-20, September.

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    More about this item

    Keywords

    Lifecycle; Bankruptcy; Housing; Mortgage Default; Labor Supply; Consumption; Education; Insurance; Moral hazard;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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