Moral Hazard versus Liquidity in Household Bankruptcy

76 Pages Posted: 24 May 2019 Last revised: 15 Jun 2020

Date Written: June 8, 2020

Abstract

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

Indarte, Sasha, Moral Hazard versus Liquidity in Household Bankruptcy (June 8, 2020). Available at SSRN: https://ssrn.com/abstract=3378669 or http://dx.doi.org/10.2139/ssrn.3378669

Sasha Indarte (Contact Author)

Wharton ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://https://sashaindarte.github.io/

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