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Regulating Consumer Bankruptcy: A Theoretical Inquiry

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  • Barry Adler
  • Ben Polak
  • Alan Schwartz

Abstract

This paper uses a principal/agent framework to analyze consumer bankruptcy. The bankruptcy discharge partly insures risk averse borrowers against bad income realizations, but also reduces the borrower's incentive to avoid insolvency. Among our results are: (a) High bankruptcy exemptions increase bankruptcy insurance but at the cost of reducing the borrower's incentives to stay solvent; (b) Reaffirmations -- renegotiations -- have ambiguous efficiency effects in general, but the right to renegotiate is especially valuable for relatively p

Suggested Citation

  • Barry Adler & Ben Polak & Alan Schwartz, 1999. "Regulating Consumer Bankruptcy: A Theoretical Inquiry," Yale School of Management Working Papers ysm128, Yale School of Management, revised 01 Jul 2000.
    • Handle: RePEc:ysm:wpaper:ysm128
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    File URL: https://repec.som.yale.edu/icfpub/publications/2425.pdf
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    References listed on IDEAS

    as
    1. Jeremy Berkowitz & Michelle J. White, 1999. "The effect of personal bankruptcy law on small firms' access to credit," Proceedings 779, Federal Reserve Bank of Chicago.
    2. Haugen, Robert A. & Senbet, Lemma W., 1988. "Bankruptcy and Agency Costs: Their Significance to the Theory of Optimal Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 27-38, March.
    3. Domowitz, Ian & Sartain, Robert L, 1999. "Incentives and Bankruptcy Chapter Choice: Evidence from the Reform Act of 1978," The Journal of Legal Studies, University of Chicago Press, vol. 28(2), pages 461-487, June.
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    Cited by:

    1. Sadeghi, Ali & Kibler, Ewald, 2022. "Do bankruptcy laws matter for entrepreneurship? A Synthetic Control Method analysis of a bankruptcy reform in Finland," Journal of Business Venturing Insights, Elsevier, vol. 18(C).
    2. Wei Fan & Michelle J. White, 2002. "Personal Bankruptcy and the Level of Entrepreneurial Activity," NBER Working Papers 9340, National Bureau of Economic Research, Inc.
    3. Wenli Li, 2001. "To forgive or not to forgive : an analysis of U.S. consumer bankruptcy choices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-22.
    4. Douglas Cumming & Minjie Zhang, 2023. "Bankruptcy law and angel investors around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(7), pages 1256-1277, September.
    5. Eva-Maria Steiger, 2006. "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings," Papers on Strategic Interaction 2006-17, Max Planck Institute of Economics, Strategic Interaction Group.
    6. Andrew B. Carver, 2007. "The Market Failure for Student Loans," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 23(Fall 2007), pages 101-115.

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