Accounting for the Rise in Consumer Bankruptcies

51 Pages Posted: 10 Sep 2007 Last revised: 8 Jul 2010

See all articles by Igor Livshits

Igor Livshits

Federal Reserve Bank of Philadelphia; University of Western Ontario - Department of Economics

James MacGee

University of Western Ontario - Department of Economics

Michèle Tertilt

University of Mannheim - Department of Economics

Date Written: September 2007

Abstract

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.

Suggested Citation

Livshits, Igor and MacGee, James and Tertilt, Michèle, Accounting for the Rise in Consumer Bankruptcies (September 2007). NBER Working Paper No. w13363. Available at SSRN: https://ssrn.com/abstract=1012817

Igor Livshits (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

James MacGee

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

Michèle Tertilt

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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