Risk and Default: Understanding Macro Drivers of Bankruptcy
33 Pages Posted: 26 Jan 2009 Last revised: 11 Oct 2011
Date Written: December 1, 2010
This paper aims to contribute to the growing empirical literature on the causes of consumer bankruptcy. The principal empirical finding is that cross-sectional variances of economic factors, such as unemployment, are strong predictors of bankruptcy rates. This supports anecdotal evidence that individuals are facing increased economic uncertainty. As a result, one can further see that uninsurable economic shocks are poorly characterized by local information, the standby for empirical analysis. We show in this paper that empirical analyses of the bankruptcy decision that include proxies for income risk find a large and statistically significant effect. Variation in permanent income can explain more than 90% of the time-series of bankruptcy rates. In the cross-section in 2007, a one standard deviation change in the variance of permanent income leads to an increase in annual bankruptcy rates of approximately 5 percentage points.
Keywords: Bankruptcy, Income Risk
JEL Classification: D14, I30, K45
Suggested Citation: Suggested Citation