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Bankruptcy, Credit Constraints, and Insurance: Some Empirics

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  • Charles Grant

    (University College London and CSEF, University of Salerno)

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.

Suggested Citation

  • Charles Grant, 2000. "Bankruptcy, Credit Constraints, and Insurance: Some Empirics," CSEF Working Papers 40, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:40
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    References listed on IDEAS

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    More about this item

    Keywords

    Bankruptcy; Consumer Borrowing; Credit Constraints;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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