Social Influence and Bankruptcy: Why do so Many Leave so Much on the Table?
36 Pages Posted: 23 Jun 2009 Last revised: 8 Mar 2010
Date Written: December 10, 2009
As much as half of the US population would 'benefit' financially from filing for bankruptcy. These benefits are in the tens of thousands of dollars. Then, why don't they file? Amongst the financial decisions that individuals make, this ranks as one of the largest in magnitude. Using a comprehensive dataset of more than 27 million individual credit reports, we identify both the presence of social interactions and separate the relative influence of stigma and information on the bankruptcy decision. We find 1) Combined social spillovers are 30-50 times larger than commonly used measures of economic and financial hardship, and of large economic significance in the bankruptcy decision. A 1% increase in local filing rates leads to a 25-40% increase in the individual probability of filing. 2) Both information diffusion and falling stigma are economically important and growing in magnitude. 3) Information diffusion is more likely responsible for the continued increase in bankruptcy rates. 4) These effects vary significantly across income and educational groups. Since so many could still benefit from filing, as information continues to spread, the bankruptcy rate will likely continue to rise.
Keywords: personal bankruptcy, social interactions, social stigma, information
JEL Classification: D14, I30, K45, Z13
Suggested Citation: Suggested Citation