Abstract

http://ssrn.com/abstract=868365
 
 

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When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings


Jochen Bigus


Free University Berlin, Department Accounting and Finance

Eva-Maria Steiger


Max Planck Institute of Economics, Strategic Interaction Group

October 2005


Abstract:     
Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors' best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer's ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

Number of Pages in PDF File: 28

Keywords: Consumer Bankruptcy, Debt Discharge, Bankruptcy Reform Act, Moral Hazard, Law & Economics

JEL Classification: D18, D91, K29

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Date posted: December 7, 2005  

Suggested Citation

Bigus, Jochen and Steiger, Eva-Maria, When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings (October 2005). Available at SSRN: http://ssrn.com/abstract=868365 or http://dx.doi.org/10.2139/ssrn.868365

Contact Information

Jochen Bigus (Contact Author)
Free University Berlin, Department Accounting and Finance ( email )
Boltzmannstr
Berlin, Berlin 14195
Germany
++49-30-83852509 (Phone)
Eva-Maria Steiger
Max Planck Institute of Economics, Strategic Interaction Group ( email )
Kahlaische Strasse 10
D-07745 Jena, 07745
Germany
HOME PAGE: http://www.econ.mpg.de/english/staff/staffpage.php?group=esi&name=steiger
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