Working Paper: NBER ID: w13363
Authors: Igor Livshits; James MacGee; Michle Tertilt
Abstract: Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
Keywords: Consumer Bankruptcies; Credit Market Innovations; Heterogeneous Agent Model
JEL Codes: E21; E44; G18; K35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in the credit market environment (G21) | Rise in consumer bankruptcies (K35) |
| Credit market innovations (G19) | Rise in consumer bankruptcies (K35) |
| Decline in the cost of bankruptcy filing (K35) | Rise in consumer bankruptcies (K35) |
| Expansion of credit access (E51) | Rise in consumer bankruptcies (K35) |
| Expense uncertainty (G52) | Rise in consumer bankruptcies (K35) |
| Increased medical expenses (H51) | Rise in consumer bankruptcies (K35) |
| Labor earnings volatility (J39) | Rise in consumer bankruptcies (K35) |
| Changes in age structure of the population (J11) | Rise in consumer bankruptcies (K35) |