A Switch in State Bankruptcy Rules

24 Pages Posted: 6 Aug 2022 Last revised: 14 Feb 2023

See all articles by Minjie Deng

Minjie Deng

Simon Fraser University, Department of Economics

Date Written: July 31, 2022


U.S. states are sovereign entities and can’t declare bankruptcy as cities and municipalities. This paper examines the impact of a switch in sovereign bankruptcy rules that allows declaring bankruptcy from an economics model perspective. Allowing bankruptcy increases ex-ante risks for the government to refuse repayment, but provides ex-post benefits of reducing default costs and saving federal bailouts. This paper provides a simple framework to analyze this tradeoff. Whether allowing for bankruptcy increases or decreases borrowing costs depends on the level of income and borrowing for the government.

Keywords: Sovereign bankruptcy, bankruptcy rules, bailouts, state government

JEL Classification: H74, F34, H81

Suggested Citation

Deng, Minjie, A Switch in State Bankruptcy Rules (July 31, 2022). Available at SSRN: https://ssrn.com/abstract=4180739 or http://dx.doi.org/10.2139/ssrn.4180739

Minjie Deng (Contact Author)

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6

HOME PAGE: http://www.minjiedeng.me/

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