Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
Assessing bankruptcy reform in a model with temptation and equilibrium default
Makoto Nakajima
Abstract

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.


Download Full text
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.
More from this series
JEL Classification:
Subject headings:
Keywords: Consumer bankruptcy; Debt; Default; Borrowing constraint; Temptation and self-control; Hyperbolic discounting; Heterogeneous agents; Incomplete markets
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal