The Political Economy of Personal Bankruptcy Law

39 Pages Posted: 27 Nov 2013

See all articles by Vito Gala

Vito Gala

Pacific Investment Management Company - PIMCO

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: November 25, 2013

Abstract

In this paper we study the political and economic determinants of US states' choices of homestead exemptions. We develop a political economy model in which homestead exemptions are ex-post beneficial to borrowers who default (because they shield some of their wealth from creditors) but ex-ante costly to all borrowers (because they increase borrowing costs). Assuming that state residents vote on homestead exemptions, we predict that states with higher levels of income inequality adopt higher levels of homestead exemptions. We test this prediction for three sample periods: cross-sectional data for 1975 and for 1860, and panel data over the 1978-2005 period. Across these three samples, we find evidence consistent with the prediction of the model. Our findings are robust to controls for other differences across states, including state fixed effects (in the panel regressions).

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

JEL Classification: D72, G18, K35

Suggested Citation

Gala, Vito and Kirshner, Jodie A. and Volpin, Paolo F., The Political Economy of Personal Bankruptcy Law (November 25, 2013). Available at SSRN: https://ssrn.com/abstract=2359591 or http://dx.doi.org/10.2139/ssrn.2359591

Vito Gala

Pacific Investment Management Company - PIMCO ( email )

650 Newport Center Drive
Newport Beach, CA 92660
United States

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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