Strategic or Nonstrategic: The Role of Financial Benefit in Bankruptcy

15 Pages Posted: 7 Feb 2015

See all articles by Shuoxun Zhang

Shuoxun Zhang

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Tarun Sabarwal

University of Kansas

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2015

Abstract

A partial test for strategic behavior in bankruptcy filing may be formulated by testing whether consumers manipulate their debt and filing decision jointly, or not: that is, testing for endogeneity of financial benefit and the bankruptcy filing decision. Using joint maximum likelihood estimation of an extended discrete choice model, test results are consistent with nonstrategic filing: financial benefit is exogenous to the filing decision. This result is confirmed in two different datasets (Panel Study of Income Dynamics and Survey of Consumer Finances). This result is consistent with an ex ante low net gain from a bankruptcy filing; a type of “rational inattention” to rare events such as bankruptcy.

Suggested Citation

Zhang, Shuoxun and Sabarwal, Tarun and Gan, Li, Strategic or Nonstrategic: The Role of Financial Benefit in Bankruptcy (April 2015). Economic Inquiry, Vol. 53, Issue 2, pp. 1004-1018, 2015. Available at SSRN: https://ssrn.com/abstract=2561669 or http://dx.doi.org/10.1111/ecin.12163

Shuoxun Zhang

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Tarun Sabarwal

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

Li Gan

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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