Consumption, Debt and Portfolio Choice: Testing the Effect of Bankruptcy Law

90 Pages Posted: 21 Mar 2002

See all articles by Andreas Lehnert

Andreas Lehnert

Board of Governors of the Federal Reserve System

Dean M. Maki

Putnam Investments - Macroeconomic Research

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Date Written: March 5, 2002

Abstract

Consumer bankruptcy laws, which vary across states and over time, permit debtors to keep assets below a statutory exemption while debts are forgiven. High exemptions distort household portfolio decisions and tempt households to default on debts; but they also provide a crude form of consumption insurance. We combine information on state-level bankruptcy laws with the Consumer Expenditure Survey from 1984--1999. We find that higher exemptions are associated with (1) Higher bankruptcy rates, (2) Households that are more likely to simultaneously hold low-return liquid assets and owe high-cost unsecured debt, and (3) Better insurance for renters and worse insurance for homeowners.

Keywords: Bankruptcy law, household debt, portfolio puzzle

JEL Classification: H73, H31, K00, D1

Suggested Citation

Lehnert, Andreas and Maki, Dean, Consumption, Debt and Portfolio Choice: Testing the Effect of Bankruptcy Law (March 5, 2002). Available at SSRN: https://ssrn.com/abstract=303822 or http://dx.doi.org/10.2139/ssrn.303822

Andreas Lehnert (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Dean Maki

Putnam Investments - Macroeconomic Research ( email )

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