Moral Hazard versus Liquidity in Household Bankruptcy
77 Pages Posted: 24 May 2019 Last revised: 3 Nov 2020
Date Written: October 26, 2020
This paper studies the role of moral hazard and liquidity in driving household bankruptcy. First, I estimate that increases in potential debt forgiveness have a positive, but small, effect on filing using a regression kink design. Second, exploiting quasi-experimental variation in mortgage payment reductions, I estimate that filing is five times more responsive to cash-on-hand than relief generosity. Using a sufficient statistic, I show the estimates imply large consumption-smoothing benefits of bankruptcy for the marginal filer. Finally, I conclude 83% of the filing response to dischargeable debt comes from liquidity effects rather than a moral hazard response to financial incentives.
JEL Classification: G51,K35
Suggested Citation: Suggested Citation