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Abstract:
In this paper, we investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand for credit rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that, if small firms are located in states with unlimited rather than low homestead exemptions, they are more likely to be denied credit, they receive smaller loans and interest rates are higher. Results for non-corporate versus corporate firms suggest that lenders often disregard small firms' organizational status in making loan decisions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
In this paper, we investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that small firms are 25% more likely to be denied credit if they are located in states with unlimited rather than low homestead exemptions.

Abstract:
This article first examines the economic justification for having a personal bankruptcy procedure at all. I argue that it is economically worthwhile to have a bankruptcy procedure, but that costs rise more quickly than benefits as the exemption level increases. Thus the bankruptcy exemption level should not be too high. Next, the article explores various strategies that households can use to increase their financial benefit from bankruptcy and calculates the proportion of households that have a financial incentive to file for bankruptcy when they use these strategies. Current U.S. bankruptcy laws are so easily manipulated that almost any household can benefit financially from bankruptcy if it plans for bankruptcy in advance. Bankruptcy exemptions are in effect unlimited, which means that U.S. law gives too many households an incentive to file for bankruptcy rather than take responsibility for repaying their debts. I also analyze the effect of adopting the exemption proposals of the National Bankruptcy Review Commission and show that they would greatly exacerbate current problems. Finally, the article explores a proposed reform of the bankruptcy system under which debtors in bankruptcy would be obliged to use part of both their wealth and their future earnings to repay debt, but there would be exemptions for both. The proposed reform would end the anomaly under the current system that some debtors obtain discharge of their debts in bankruptcy even though they have high incomes and, often, high wealth. I show that under the proposed reform, fewer households would have an incentive to file for bankruptcy, but most of those who would be deterred from filing have high ability to repay their debts. Households that have low wealth and low income would still benefit from discharge of debt in bankruptcy and a "fresh start."

Abstract:
In this paper, we model and estimate the effects of both bankruptcy stigma and financial benefit on households' decisions to file for bankruptcy. We show that the probability of debtors filing for bankruptcy rises when the level of bankruptcy stigma falls. We also show that the level of bankruptcy stigma has external effects, so that individual households are better off if their own bankruptcy stigma level is lower than that of others in the same credit pool and are worse off if their own bankruptcy stigma level is higher than that of others in the same credit pool. Using new data, we find that the probability of filing for bankruptcy is positively and significantly related to the financial benefit from filing. If households' financial benefit from bankruptcy rose by $1,000, the model predicts that the number of filings would rise by 2.8%. As an inverse proxy for the level of bankruptcy stigma, we use the aggregate filing rate in households' state of residence over the past three years, corrected for state fixed effects. We find that this measure is positively and significantly related to the probability of filing for bankruptcy. According to the model, if the bankruptcy filing rate in a particular state doubled, the reduction in the level of bankruptcy stigma would cause the state's filing rate to increase by an additional 19% in the following year. Finally, our model predicts that if the 1997 National Bankruptcy Review Commission's proposed increases in bankruptcy exemption levels were implemented, then the number of bankruptcy filings would increase by about 89,000 per year.

Abstract:
Drivers have been running an "arms race" on American roads by buying increasingly heavy vehicles such as SUVs, vans and light trucks. An important reason for the popularity of large vehicles is that families view them as providing better protection to their occupants if a crash occurs. But when families drive larger vehicles, they pose an increased danger to occupants of smaller vehicles and to pedestrians and bicyclists. This paper measures both the beneficial internal effect of heavier vehicles on their own occupants' safety and the negative external effect of heavier vehicles on occupants of cars, pedestrians and bicyclists. The main result is that when drivers replace cars with light trucks, 3,700 additional crashes per year involving fatalities of smaller vehicle occupants, pedestrians and bicyclists occur, while only 1,400 crashes involving fatalities of light truck occupants are avoided, i.e., the ratio of negative external effects to positive internal effects is 2-1/2 to 1. The paper argues that none of the existing traffic laws or institutions forces drivers of heavy vehicles to take account of their negative external effects.

liability rules, externalities, traffic, accidents, fatalities, external effects

Abstract:
Drivers have been running an 'arms race' on American roads by buying increasingly heavy vehicles such as SUVs, vans and light trucks. Families view large vehicles as providing better protection to their own occupants if a crash occurs, but these vehicles pose an increased danger to occupants of smaller vehicles and to pedestrians and bicyclists. This paper measures both the beneficial internal effect and the negative external effect of heavier vehicles. The main result is that when drivers replace cars with light trucks, 3,700 additional crashes per year involving fatalities of smaller vehicle occupants, pedestrians and bicyclists occur, while only 1,400 crashes involving fatalities of light truck occupants are avoided, i.e., the ratio of negative external effects to positive internal effects is 2-1/2 to 1. The paper argues that none of the existing traffic laws or institutions forces drivers of heavy vehicles to take account of their negative external effects.

Abstract:
Congress is again attempting to reform federal bankruptcy law by making bankruptcy less favorable for households whose incomes are above the median level. Whatever the merits of that legislation, it would have a negative impact on small business and on U.S. workers who receive their income from such businesses. Among the proposed reforms are limits on the current "fresh start" provision that protects bankrupt individuals' future earnings.

Data show that small business growth is more vigorous when bankruptcy laws offer more protection of entrepreneurs' assets. That suggests that, if "fresh start" reform is adopted, it could dissuade risk-adverse potential entrepreneurs from starting new businesses.

Abstract:
We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obligation to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for risk averse debtors by discharging some debt when debtors' ability to repay turns out to be low. However, the current bankruptcy system encourages debtors to file for bankruptcy even when their ability to repay is high. The proposed reform maintains the insurance function of bankruptcy but reduces debtors' incentive to take advantage of the system. Using simulation techniques, we show that the reform improves efficiency relative to the current system.

Abstract:
We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obligation to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for risk averse debtors by discharging some debt when debtors' ability to repay turns out to be low. However the current bankruptcy system encourages debtors to file for bankruptcy even when their ability to repay is high. The proposed reform maintains the insurance function of bankruptcy, but reduces debtors' incentive to take advantage of the system. Using simulation techniques, we show that the reform improves efficiency relative to the current system.

Abstract:
The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of non-corporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore the probability of owning a business increases as the exemption level rises. We test this prediction and find that the probability of households owning businesses is 35% higher if they live in states with unlimited rather than low exemptions. We also find that the probability of starting a business and the probability of owning a corporate rather than non-corporate business are higher for households that live in high exemption states.

Abstract:
The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as for consumers. When firms are non-corporate, debts of the firm are personal liabilities of the entrepreneur/owner. If the firm fails, the entrepreneur has an incentive to file for bankruptcy under Chapter 7, since both business debts and the entrepreneur's personal debts will be discharged. The entrepreneur must give up assets above a fixed bankruptcy exemption level for repayment to creditors, but future earnings are entirely exempt. Exemption levels are set by the states and they vary widely.

We show that higher bankruptcy exemption levels benefit potential entrepreneurs by providing partial wealth insurance. This means that the predicted relationship between the probability of owning a business and the exemption level is positive at low exemption levels, but may be either positive or negative at high exemption levels, depending on whether higher bankruptcy costs outweigh the gain from additional insurance. We test this prediction and find evidence that the probability of owning a business is about 28% higher if potential entrepreneurs live in states with unlimited exemptions rather than low exemptions. We also find evidence that families are significantly more likely to start businesses if they live in states with high or unlimited, rather than low, bankruptcy exemptions. They are also more likely to organize their businesses as non-corporate rather than corporate if they live in states with high exemptions.

Abstract:
Fifteen states in the U.S., one province in Canada, two provinces in Australia, and New Zealand have adopted no-fault systems to partially or completely replace the tort system in cases involving traffic accidents. Under the traditional tort system, accident victims have the right to collect partial or full compensation for their damage from injurers if a court finds that injurers were negligent. In contrast under a no-fault regime, injurers are never liable for victims? damage. Instead, all drivers are required to purchase insurance and victims collect compensation for their damage from their own insurance companies, rather than from the injurer or the injurer's insurance company.

In this paper we compare incentives and efficiency under the tort system (the comparative negligence rule) versus the no-fault system. We concentrate on no-fault as a liability rule rather than an insurance system and we analyze both pure no-fault and mixed no-fault systems that allow victims to opt out of no-fault and sue injurers if victims' damage exceeds a threshold level. Our main results are the following: (1) Under pure no-fault, drivers have an incentive to use either the economically efficient level of care or less, but never more. (2) The mixed no-fault system with a zero threshold for opt-out is identical to the pure tort system in terms of drivers' incentives to use care and to file lawsuits. Similarly, the mixed no-fault system with an infinite threshold is identical to the pure no-fault system. In between, the mixed no-fault system with an intermediate threshold level gives drivers different incentives than either of the pure systems. (3) No single system always dominates the others on efficiency grounds; but the simulation results show that pure no fault and the mixed no-fault system with a high threshold for opting out are preferred under the widest range of parameter values.

Abstract:
This paper investigates the relationship between bankruptcy exemptions and the availability of credit for mortgage and home improvement loans. We develop a combined model of debtors' decisions to file for bankruptcy and to default on their mortgages and show that the theory predicts positive relationships between both the homestead and personal property exemption levels and the probability of borrowers being denied mortgage (secured) and home improvement loans. We test these predictions empirically and find strong and statistically significant support when evidence from cross-state variation in bankruptcy exemption levels is used. Applicants for mortgages are 2 percentage points more likely to be turned down for mortgages and 5 percentage points more likely to be turned down for home improvement loans if they live in states with unlimited rather than low homestead exemptions. These relationships also hold when we introduce state fixed effects into the model.

Abstract:
Bankruptcy policy balances conflicting objectives of providing consumption insurance to debtors and protecting creditors. The adoption of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act shifted the balance toward creditors by raising debtors' cost of filing for bankruptcy and reducing the amount of debt that is discharged in bankruptcy. The changes will have little effect on "opportunistic" debtors, who can still use pre-bankruptcy planning shelter substantial assets in bankruptcy. But the changes are likely to harm many non-opportunistic debtors - the people whom bankruptcy law is intended to help - simply because they cannot afford the high cost of filing. A better policy approach would be to require debtors to use of portion of both their wealth and future income to make payments on their debt, which would protect non-opportunistic debtors while deterring opportunism.

bankruptcy law, BAPCPA, debtor, creditor, consumption insurance, credit availability, bankruptcy, opportunistic debtors, non-opportunists

Abstract:
The number of asbestos personal injury claims filed each year is in the hundreds of thousands and has been increasing rather than decreasing over time, even though asbestos stopped being used in the early 1970's. Eighty firms have filed for bankruptcy due to asbestos liabilities including 30 filings since the beginning of 2000. This paper examines why asbestos claims are increasing over time. Because large numbers of asbestos claims are filed in particular courts, judges in these courts have adopted procedural innovations intended to clear their dockets by encouraging mass settlements. These innovations cause trial outcomes to change in plaintiffs' favor. As a result, the innovations make the asbestos crisis worse by giving plaintiffs' lawyers an incentive to file large numbers of additional claims in the same courts. The paper uses a new dataset of asbestos trials to test the hypothesis that three important procedural innovations - consolidated trials, bifurcation, and bouquet trials - favor plaintiffs and therefore encourage the filing of additional claims. I find that bifurcation and bouquet trials nearly triple plaintiffs' expected return from trial, while consolidations of up to seven lawsuits raise plaintiffs' expected return from trial by one-third to one-half.

Abstract:
Is there a fair way for policymakers to free the American economy from the specter of never-ending asbestos litigation?

Even though the number of cancer deaths attributed to asbestos exposure has been dropping since 1992, some 80 firms linked to asbestos production and use have gone bankrupt, and some $54 billion has been paid out in compensation to sufferers of various asbestos-related illnesses, the number of new asbestos-related claims has begun rising in recent years. Unlike other mass torts, asbestos litigation has no natural ending point because the number of plaintiffs and potential defendants is virtually unlimited - bankrupt asbestos manufacturers are replaced as defendants by firms that sold or installed asbestos-containing products, manufacturers whose products incorporated an asbestos-containing component, or owners of production facilities that had asbestos insulation in their buildings. Needless to say, this litigation and potential future litigation poses a severe threat to the U.S. economy. Is there a way to resolve all this litigation efficiently and, at the same time, fairly compensate plaintiffs and potential plaintiffs?

Asbestos, asbestos litigation, tort law, mass torts, tort reform

Abstract:
Asbestos was once referred to as a miracle mineral' for its ability to withstand heat and it was used in thousands of products. But exposure to asbestos causes cancer and other diseases. As of the beginning of 2001, 600,000 individuals had filed lawsuits for asbestos-related diseases against more than 6,000 defendants. 85 firms have filed for bankruptcy due to asbestos liabilities and several insurers have failed or are in financial distress. More than $54 billion has been spent on the litigation higher than any other mass tort. Estimates of the eventual cost of asbestos litigation range from $200 to $265 billion. The paper examines the history of asbestos regulation and asbestos liability and argues that it was liability rather than regulation that eventually caused producers to eliminate asbestos from most products by the late 1970s. But despite the disappearance of asbestos products from the marketplace, asbestos litigation continued to grow. Plaintiffs' lawyers used forum-shopping to select the most favorable state courts techniques for mass processing of claims, and substituted new defendants when old ones went bankrupt. Because representing asbestos victims was extremely profitable, lawyers had an incentive to seek out large numbers of additional plaintiffs, including many claimants who were not harmed by asbestos exposure. The paper contrasts asbestos litigation to other mass torts involving personal injury and concludes that asbestos was unique in a number of ways, so that future mass torts are unlikely to be as big. However new legal innovations developed for asbestos are likely to make future mass torts larger and more expensive. I explore two mechanisms-- bankruptcies and class action settlements--that the legal system has developed to resolve mass torts and show that neither has worked for asbestos litigation. The first, bankruptcy by individual asbestos defendants, exacerbates the litigation by spreading it to non-bankrupt defendants. The second, a class action settlement, is impractical for asbestos litigation because of the large number of defendants. As a result, Congressional legislation is needed and the paper discusses the compensation fund approach that Congress is currently considering.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper surveys research on the economics of corporate and personal bankruptcy law. Since the literatures on the two types of bankruptcy have developed in isolation of each other, a goal of the survey is to draw out parallels between them. Both theoretical and empirical research are discussed.

Abstract:
From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. Lenders responded to the high filing rate with a major lobbying campaign for bankruptcy reform that led to the adoption in 2005 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made bankruptcy law much less debtor-friendly. The paper first examines why bankruptcy rates increased so sharply. I argue that the main explanation is the rapid growth in credit card debt, which rose from 3.2% of U.S. median family income in 1980 to 12.5% in 2004. The paper then examines how the adoption of BAPCPA changed bankruptcy law. Prior to 2005, bankruptcy law provided debtors with a relatively easy escape route from debt, since credit card debt and other types of debt could be discharged in bankruptcy and even well-off debtors had no obligation to repay. BAPCPA made this escape route less attractive by increasing the costs of filing and forcing some high-income debtors to repay from post-bankruptcy income. However, because many consumers are hyperbolic discounters, making bankruptcy law less debtor-friendly will not solve the problem of consumers borrowing too much. This is because, when less debt is discharged in bankruptcy, lending becomes more profitable and lenders increase the supply of credit. The paper examines the determinants of an optimal bankruptcy law. It also considers the relationship between bankruptcy law and regulation of lending behavior and discusses proposals that would reduce lenders incentives to supply too much credit to debtors who are likely to become financially distressed.

Abstract:
This paper discusses four bankruptcy-related policy issues. First, what is the economic rationale for having a bankruptcy procedure at all and what defines an economically efficient bankruptcy procedure? Second, why did the number of U.S. bankruptcy filings increase so dramatically between 1980 and 2005? Third, a major bankruptcy reform went into effect in the United States in 2005 - what did it do and how did it affect credit and mortgage markets? Finally, the paper discusses the mortgage crisis, the high social cost of foreclosures, and the difficulty of avoiding foreclosure by voluntarily renegotiation of mortgage contracts, even when such renegotiations are in the joint interest of debtors and creditors. I also discuss the pros and cons of government programs to refinance mortgages and the argument for giving bankruptcy judges new power to change the terms of residential mortgage contracts in bankruptcy.

Abstract:
This paper discusses four bankruptcy-related policy issues. First, what is the economic rationale for having a bankruptcy procedure at all and what defines an economically efficient bankruptcy procedure? Second, why did the number of U.S. bankruptcy filings increase so dramatically between 1980 and 2005? Third, a major bankruptcy reform went into effect in the U.S. in 2005 - what did it do and how did it affect credit and mortgage markets? Finally, the paper discusses the mortgage crisis, the high social cost of foreclosures, and the difficulty of avoiding foreclosure by voluntarily renegotiation of mortgage contracts, even when such renegotiations are in the joint interest of debtors and creditors. I also discuss the pros and cons of government programs to refinance mortgages and the possibility of giving bankruptcy judges new power to change the terms of mortgage contracts in bankruptcy.

Abstract:
This paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit. While generous state-level bankruptcy exemptions are probably viewed by most policymakers as benefitting less-well-off borrowers, our results using data from the 1983 Survey of Consumer Finances suggest they increase the amount of credit held by high-asset households and reduce the availability and amount of credit to low-asset households, conditioning on observable characteristics. We also find evidence that interest rates on automobile loans for low-asset households are higher in high exemption states. Thus, bankruptcy exemptions redistribute credit toward borrowers with high assets.

Abstract:
This paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit. While generous state-level bankruptcy exemptions are probably viewed by most policy makers as benefiting less-well-off borrowers, our results using data from the 1983 Survey of Consumer Finances suggest they increase the amount of credit held by high-asset households and reduce the availability and amount of credit to low-asset households, conditioning on observable characteristics. We also find evidence that interest rates on automobile loans for low- asset households are higher in high exemption states. Thus, bankruptcy exemptions redistribute credit toward borrowers with high assets.

Abstract:
Proposition 13, adopted by California voters in 1978, mandates a property tax rate of one percent, requires that properties be assessed at market value at the time of sale, and allows assessments to rise by no more than 2% per year until the next sale. In this paper, we examine how Prop 13 has affected the average tenure length of owners and renters in California versus in other states. We find that from 1970 to 2000, the average tenure length of owners and renters in California increased by 1.04 years and .79 years, respectively, relative to the comparison states. We also find substantial variation in the response to Prop 13, with African-American households responding more than households of other races and migrants responding more than native-born households. Among owner-occupiers, the response to Prop 13 increases sharply as the size of the subsidy rises. Homeowners living in inland California cities such as Bakersfield receive Prop 13 subsidies averaging only $110/year and their average tenure length increased by only .11 years in 2000, but owners living in coastal California cities receive Prop 13 subsidies averaging in the thousands of dollars and their average tenure length increased by 2 to 3 years.

Abstract:
New data on medical malpractice claims against a single hospital where a direct measure of the quality of medical care is available are used to address 1) the specific question of the role of the negligence rule in the dispute settlement process in medical malpractice, and 2) the general question of how the process of negotiation and dispute resolution in medical malpractice operates with regard to both the behavior of the parties and the outcome of the process. We find that the quality of medical care is an extremely important determinant of defendants' medical malpractice liability. More generally, we find that the data are consistent with a model where (1 the plaintiff is not well informed ex ante about the likelihood of negligence and 2) the ex ante expected value to the plaintiff of a suit is high relative to the costs of filing a suit and getting more information. Thus, suits are filed even where there is no concrete reason to believe there has been negligence, and virtually all suits are either dropped or settled based on the information gained after filing. We conclude that the filing of suits that appear, ex post, to be nuisance suits can be rational equilibrium behavior, ex ante, where there is incomplete information about care quality.

Abstract:
This article compares incentives and efficiency under the pure tort system (the comparative negligence rule) to those under pure and mixed no-fault systems. Under no-fault systems, drivers are allowed to opt out of no-fault and file lawsuits if their damages exceed a certain threshold. We find that no single liability system always dominates on efficiency grounds, but the pure tort system does best when costs of care are low, and pure no-fault does best when costs of care are high. Choice systems, in which drivers choose between no-fault or pure tort systems, lead to less efficient results because drivers choose the pure tort rule too often.

Abstract:
This paper examines the divergence of interest between universities and state governments concerning standards for admitting in-state versus out-of-state students. States have an interest in using universities to attract and retain high ability individuals because they pay higher taxes and contribute more to economic development. In contrast, universities have an interest in their graduates being successful, but little interest in where students come from or where they go after graduation. We develop and test a model that illustrates the divergence of interest between universities and their states. We find that public universities set lower minimum admissions standards for in-state than out-of-state applicants, presumably following their states' preferences, while private universities on average treat both groups equally. However we find that states in fact gain financially when public universities admit additional out-of-state students. This is because attending a public university in a particular state increases marginal students' probability of locating in the state after graduation by the same amount regardless of whether students are from in-state or out-of-state. And because marginal out-of-state students earn more, their expected future state tax payments are higher. We also estimate states' financial gain when public and private universities admit additional in-state versus out-of-state students who have middle and high ability levels. Surprisingly, we find that high ability students tend to be at least as strongly influenced in their adult location choices by where they attend university than are middle and low ability students. Since high ability students also earn more, this suggests that states gain financially when their universities attract high ability students, regardless of whether the students are from in-state or out-of-state or the universities are public or private. Our results suggest a rationale for public support of flagship public universities that can attract high-ability students.

Abstract:
This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed debtors save their homes. We develop a model of debtorsâ¬" decisions to default on their mortgages and file for bankruptcy under Chapter 13 and evaluate the model using new data on Chapter 13 bankruptcy filers. We also examine the effect of allowing bankruptcy judges to reduce debtorsâ¬" mortgage payments, i.e., introducing â¬Scram-downâ¬? of mortgages in Chapter 13.

We find that 96% of Chapter 13 filers are homeowners and 79% of filers repay mortgage debt in their repayment plans; while just 9% of filers repay only unsecured debt in their plans. These results suggest that filers use Chapter 13 almost exclusively as a â¬Ssave-your-homeâ¬? procedure. But under current law, only about 1% Chapter 13 filers save their homes when they would otherwise have defaulted. If cram-down were introduced, we predict that this fraction would increase to 10%. The cost to lenders of introducing cram-down is estimated to be $264,000 per home saved and $30 billion in total.

Institutional subscribers to the NBER working paper series, and resident of developing countries may download this paper without additional charge at www.nber.org

Abstract:
In this paper we examine the relationship between homeowners' bankruptcy decisions and their mortgage default decisions and the relationship between homeowners' bankruptcy decisions and lenders' decisions to foreclose. In theory, both relationships could be either substitutes or complements. Bankruptcy and default tend to be substitutes because homeowners’ budgets are limited and, if they spend less on payments to unsecured lenders, then they have more money to pay their mortgages. But bankruptcy and default may also be complements if homeowners use bankruptcy to reduce the cost of defaulting on their mortgages. Bankruptcy and foreclosure similarly may be either substitutes or complements. In fact we show that both relationships are complementary, although homeowners reacted to the 2005 bankruptcy reform by treating them as substitutes.

We also show that bankruptcies, defaults and foreclosures all tend to spread, i.e., higher bankruptcy rates in the neighborhood raise homeowners' probability of filing, higher default rates raise homeowners' probability of defaulting, and higher foreclosure rates raise homeowners' probability of foreclosure. We provide estimates of the size of these effects.

The paper argues that these relationships have important public policy implications. In particular, foreclosures have very high social costs, and some of these costs are external to both borrowers and lenders. As a result, there is a social gain from discouraging bankruptcies, since fewer bankruptcies mean fewer defaults and foreclosures. We show that these considerations shift optimal bankruptcy law in a pro-creditor direction, because pro-creditor bankruptcy policies reduce the number of filings and therefore reduce foreclosures. But the same considerations shift other policies that affect bankruptcy in a pro-debtor direction. This is because pro-debtor shifts in, for example, wage garnishment policy reduce the number of bankruptcy filings and therefore reduce foreclosures.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Drivers have been running an "arms race" on American roads by buying increasingly large vehicles such as SUVs and light trucks. An important reason for the popularity of large vehicles is that families view them as providing better protection to their occupants if a crash occurs. But when families drive large vehicles, they pose an increased danger to occupants of smaller vehicles and to pedestrians, bicyclists and motorcyclists. This paper measures both the internal effect of large vehicles on their own occupants' safety and their external effect on others. The results show that light trucks are extremely deadly. For each one million light trucks that replace cars, between 34 and 93 additional car occupants, pedestrians, bicyclists or motorcyclists are killed per year and the value of the lives lost is between $242 and $652 million per year. The safety gain that families obtain for themselves from driving large vehicles comes at a very high cost: for each fatal crash that occupants of large vehicles avoid, at least 4.3 additional fatal crashes involving others occur.

Abstract:
Both Britain and France have adopted new bankruptcy/ insolvency laws since 1985 and a new bankruptcy law has also been proposed in Germany. Bankruptcy laws in the three European countries have traditionally been oriented toward liquidation, but the new laws move in the direction of allowing reorganization in some circumstances. This paper has several purposes. First, it identifies and compares basic differences in bankruptcy procedures in the four countries. Second, the costs (losses in economic efficiency) attributable to bankruptcy are identified. Bankruptcy costs incurred before it is known whether firms will be financially distressed are shown likely to be more important determinants of whether bankruptcy policy is economically efficient than bankruptcy costs incurred after firms have become financially distressed and/or have filed for bankruptcy. Third, the costs of bankruptcy under the laws of the four countries-- as well as under various proposed bankruptcy reforms--are analyzed. The analysis suggests that bankruptcy costs incurred before it is known whether firms will be financially distressed are likely to pull bankruptcy policy in the opposite direction from costs incurred after firms become financially distressed. As a result, it is impossible to determine from theory whether the more liquidation-oriented bankruptcy policies of the European countries or the more reorganization-oriented policy of the U.S. is more economically efficient.

Abstract:
A much higher fraction of U.S. households would benefit financially from bankruptcy than actually file. While the current bankruptcy filing rate is about one percent of households each year, I calculate that at least 15% of households would benefit financially from filing and the actual figure would be several times higher if most households plan in advance for the possibility of filing. Two explanations are explored for why more households don't file for bankruptcy. The first is a model of the interaction between creditors' remedies against debtors who default and debtors' right to file for bankruptcy. The model implies that some debtors default but do not file for bankruptcy, even though they would benefit financially from doing so, because creditors do not always attempt to collect. The other explanation involves the option value of bankruptcy. Many debtors who would not benefit from filing immediately gain from having the option to file in the future. I calculate the value of the option for typical households and show that it can be very valuable, particularly for households that have high variance of the return to net wealth and households that live in states with high bankruptcy exemption levels.