Insurance or deliberate use of the law for financial gain? Testing for heterogeneous filing behavior in personal bankruptcy *

Abstract

Personal bankruptcy can serve as insurance for large financial shocks but may also provide an opportunity for deliberate use. This paper proposes and implements a model to test for the coexistence of heterogeneous filing behaviors in the bankruptcy decision. We identify two different filing behaviors using data from the United States. One group can be associated with individuals who do not intend to deliberately use the law in the absence of an adverse event, while the second group is more consistent with a "strategic" behavior that also exhibits a higher probability of filing for bankruptcy and financial benefit from filing. The larger prevalence of the first group supports the insurance function of bankruptcy. We further show that the proposed model can help to better identify eventual filers compared to standard probabilistic models that do not allow for heterogeneous filers.

Keywords: Heterogeneous filing behavior, personal bankruptcy, financial gain, debt manipulation JEL codes: G51, C31, D14, C38, K35