Accounting for the Rise in Consumer Bankruptcies
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.
We thank Kartik Athreya, Satyajitt Chatterjee, Huberto Ennis, Martin Gervais, Jeremy Greenwood, Karen Pence, Jose-Victor Rios-Rull, Stephen Zeldes and seminar participants at the 2005 Philadelphia Fed Consumer Credit & Payments conference, November 2005 NBER ME conference, the SITE 2004 conference, the 2003 Western-Toronto Macro conference, the SED Meetings in Paris and Florence, the Federal Reserve Banks of Minneapolis, Richmond, and Chicago, the Bank of Canada, the European Central Bank, and UC Davis, Illinois, Iowa, New Brunswick, Pennsylvania, Rochester, Texas-Austin, Wharton, York and Queen's Universities for helpful comments. Livshits acknowledges financial support from the Arts, Humanities & Social Sciences Fund of the UWO. Livshits and MacGee acknowledge financial support from SSHRCC and from the Economic Policy Research Institute. Tertilt is grateful to financial support from NSF grant No. 0519324. We would like to thank Jie Zhou for excellent research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Igor Livshits & James MacGee & Michele Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-93, April. citation courtesy of