Who Invests in Home Equity to Exempt Wealth from Bankruptcy?

SAFE Working Paper No. 21

49 Pages Posted: 23 May 2013

See all articles by Stefano Corradin

Stefano Corradin

European Central Bank (ECB)

Reint Gropp

Halle Institute for Economic Research

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2013

Abstract

Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data for the period 1996 to 2006, we find that household demand for real estate is relatively high if the marginal investment in home equity is covered by the exemption. The home equity bias is more pronounced for younger households that face more financial uncertainty and therefore have a higher ex ante probability of bankruptcy.

Keywords: Homestead exemptions, Personal bankruptcy, Portfolio allocation, Home ownership

JEL Classification: G11, K35, R21

Suggested Citation

Corradin, Stefano and Gropp, Reint and Huizinga, Harry and Laeven, Luc A., Who Invests in Home Equity to Exempt Wealth from Bankruptcy? (May 2013). SAFE Working Paper No. 21, Available at SSRN: https://ssrn.com/abstract=2268926 or http://dx.doi.org/10.2139/ssrn.2268926

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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