Consumer Bankruptcy and Default: The Role of Individual Social Capital

Abstract:     
An individual's decision to maximize his investment in social capital is determined by his socioeconomic characteristics, such as homeownership and mobility (Glaeser, Laibson, and Sacerdote, 2002). In this paper, we empirically assess the role of individual social capital formation characteristics on personal bankruptcy and default outcomes in the consumer credit market. After controlling for a borrower's risk score, debt, income, wealth, and legal and economic environments, we find that default/bankruptcy risk rises and then falls over the lifecycle, while a borrower who owns a home or is married has a lower risk of default/bankruptcy. Moreover, a borrower who migrates 190 miles from his "state of birth" is 17 percent more likely to default and 15 percent more likely to file for bankruptcy, while a borrower who continues to live in his state of birth is 14 and 10 percent less likely to default and file for bankruptcy, respectively. A borrower who moves to a rural area is 9 and 7 percent less likely to default and declare bankruptcy, respectively. We also find that measures of social networks, norms, and cooperation and trust (i.e., aggregate social capital) are inversely related to consumer bankruptcy.

Keywords: Social Capital, Consumer Bankruptcy, Default, Credit Risk, Credit Cards, Banking

JEL Classifications: D1, D8, G2

Working Paper Series