Working Paper: NBER ID: w26254
Authors: Tal Gross; Raymond Kluender; Feng Liu; Matthew J. Notowidigdo; Jialan Wang
Abstract: A more generous consumer bankruptcy system provides greater insurance against financial risks, but it may also raise the cost of credit to consumers. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which raised the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs by exploiting variation in the effects of the reform on bankruptcy risk across credit-score segments. Using a combination of administrative records, credit reports, and proprietary market-research data, we find that the reform reduced bankruptcy filings, and reduced the likelihood that an uninsured hospitalization received bankruptcy relief by 70 percent. BAPCPA led to a decrease in credit card interest rates, with an implied pass-through rate of 60–75 percent. Overall, BAPCPA decreased the gap in offered interest rates between prime and subprime consumers by roughly 10 percent.
Keywords: bankruptcy; consumer credit; interest rates; BAPCPA
JEL Codes: D14; G21; G28; K35; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bankruptcy Filings (K35) | Likelihood of Uninsured Hospitalization Relief (G52) |
| Interest Rates (E43) | Cost Savings to Creditors (G33) |
| BAPCPA (K35) | Bankruptcy Filings (K35) |
| BAPCPA (K35) | Bankruptcy Filing Risk (G33) |
| BAPCPA (K35) | Interest Rates (E43) |
| Bankruptcy Filing Risk (G33) | Interest Rates (E43) |