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Federal Reserve Bank of Philadelphia
Personal Bankruptcy as a Real Option
We provide a novel explanation to the longstanding puzzle of the “missing bankruptcy ﬁlings.” Even though a household with a negative net worth will receive contemporaneous beneﬁt from bankruptcy, there may be greater insurance value from delaying the ﬁling. Household bankruptcy is thus an American-style put option, which is not necessarily exercised even if the option is "in the money." Based on the value functions in the household’s dynamic programming problem, we formulate the value of the bankruptcy option as well as the exercise price. We estimate a life-cycle model in which households choose the optimal time to exercise their bankruptcy option.
Cite this item
Guozhong Zhu & Vyacheslav Mikhed & Barry Scholnick, Personal Bankruptcy as a Real Option, Federal Reserve Bank of Philadelphia, Working Papers 19-46, 13 Nov 2019.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
Keywords: personal bankruptcy; option value; life cycle; secured and unsecured debts
This item with handle RePEc:fip:fedpwp:19-46
is also listed on EconPapers
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