Federal Reserve Bank of Philadelphia
Assessing bankruptcy reform in a model with temptation and equilibrium default
A life-cycle model with equilibrium default in which consumers with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform and other counterfactual reforms. The calibrated model indicates that the 2005 bankruptcy reform achieves its goal of reducing the number of bankruptcy filings, as seen in the data, but at the cost of loss in social welfare. The creditor-friendly reform provides borrowers with a stronger commitment to repay and thus yields lower default premia and better consumption smoothing. However, those who borrow and default due to temptation or unavoidable large expenditures suffer more under the reform due to higher costs or means-testing requirement. Moreover, those who borrow due to temptation suffer from overborrowing when the borrowing cost declines. The model indicates that the negative welfare effects dominate.
Cite this item
Makoto Nakajima, Assessing bankruptcy reform in a model with temptation and equilibrium default, Federal Reserve Bank of Philadelphia, Working Papers 15-12, 09 Mar 2015.
- D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
Keywords: Consumer bankruptcy; Debt; Default; Borrowing constraint; Temptation and self-control; Hyperbolic discounting; Heterogeneous agents; Incomplete markets
This item with handle RePEc:fip:fedpwp:15-12
is also listed on EconPapers
For corrections, contact Beth Paul ()