The Political Economy of Personal Bankruptcy Laws: Evidence from the 1978 Reform

34 Pages Posted: 22 Mar 2011 Last revised: 16 Jul 2012

See all articles by Jodie A. Kirshner

Jodie A. Kirshner

University of Cambridge

Paolo F. Volpin

City University London - Faculty of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: August 3, 2011

Abstract

In this paper we study the political and economic determinants of the US states’ choices of levels of homestead exemptions, following the 1978 reform of the personal bankruptcy laws. To do so, we develop a political economy model in which homestead exemptions are ex-post beneficial to borrowers who default but ex-ante costly to all borrowers because they increase the cost of borrowing. By assuming that state residents vote on homestead exemptions, we formulate predictions and test them using state-level data. We find that states with higher levels of income inequality prior to 1978 chose to adopt higher levels of homestead exemptions following the bankruptcy reform. This result is robust to controls for other differences across states, including the level of homestead exemptions prior to 1978.

Keywords: personal bankruptcy, homestead exemption, political economy, federalism, creditor rights, income inequality.

JEL Classification: D72, G18, K35

Suggested Citation

Kirshner, Jodie A. and Volpin, Paolo F., The Political Economy of Personal Bankruptcy Laws: Evidence from the 1978 Reform (August 3, 2011). Available at SSRN: https://ssrn.com/abstract=1443373 or http://dx.doi.org/10.2139/ssrn.1443373

Jodie A. Kirshner (Contact Author)

University of Cambridge ( email )

Cambridge, CB3 0DS
United Kingdom

Paolo F. Volpin

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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