Unsecured Debt with Public Insurance: From Bad to Worse

FRB Richmond Working Paper No. 03-14R

40 Pages Posted: 3 Dec 2012

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Nicole B. Simpson

Colgate University - Economics Department

Date Written: November 24, 2004

Abstract

In U.S. data, income interruptions, the receipt of public insurance, and the incidence of personal bankruptcy are all closely related. The central contribution of this paper is to evaluate both bankruptcy protection and public insurance in a unified setting where each program alters incentives in the other. Specifically, we explicitly allow for distortion created by the default option and public insurance to affect 1) risk-taking, 2) borrowing, and 3) search effort. Our analysis delivers two striking conclusions. First, we find that U.S. personal bankruptcy law is an important barrier to allowing the public insurance system to improve welfare. Second, contrary to popular belief, we find that increases in the generosity of public insurance will lead to more, not less, bankruptcy.

Keywords: incomplete markets, bankruptcy, unemployment

JEL Classification: D52, G33, J64

Suggested Citation

Athreya, Kartik and Simpson, Nicole, Unsecured Debt with Public Insurance: From Bad to Worse (November 24, 2004). FRB Richmond Working Paper No. 03-14R, Available at SSRN: https://ssrn.com/abstract=2184507 or http://dx.doi.org/10.2139/ssrn.2184507

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Nicole Simpson

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States
315-228-7991 (Phone)

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