The Bankruptcy Decision: Does Stigma Matter?

University of Michigan Working Paper No. 98-01

49 Pages Posted: 26 Mar 1998

See all articles by Scott A. Fay

Scott A. Fay

University of Florida, Department of Marketing

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Michelle J. White

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 1998

Abstract

In this paper, we model and estimate the effects of both bankruptcy stigma and financial benefit on households' decisions to file for bankruptcy. We show that the probability of debtors filing for bankruptcy rises when the level of bankruptcy stigma falls. We also show that the level of bankruptcy stigma has external effects, so that individual households are better off if their own bankruptcy stigma level is lower than that of others in the same credit pool and are worse off if their own bankruptcy stigma level is higher than that of others in the same credit pool. Using new data, we find that the probability of filing for bankruptcy is positively and significantly related to the financial benefit from filing. If households' financial benefit from bankruptcy rose by $1,000, the model predicts that the number of filings would rise by 2.8%. As an inverse proxy for the level of bankruptcy stigma, we use the aggregate filing rate in households' state of residence over the past three years, corrected for state fixed effects. We find that this measure is positively and significantly related to the probability of filing for bankruptcy. According to the model, if the bankruptcy filing rate in a particular state doubled, the reduction in the level of bankruptcy stigma would cause the state's filing rate to increase by an additional 19% in the following year. Finally, our model predicts that if the 1997 National Bankruptcy Review Commission's proposed increases in bankruptcy exemption levels were implemented, then the number of bankruptcy filings would increase by about 89,000 per year.

JEL Classification: H31

Suggested Citation

Fay, Scott A. and Hurst, Erik and White, Michelle J., The Bankruptcy Decision: Does Stigma Matter? (January 1998). University of Michigan Working Paper No. 98-01. Available at SSRN: https://ssrn.com/abstract=70915 or http://dx.doi.org/10.2139/ssrn.70915

Scott A. Fay (Contact Author)

University of Florida, Department of Marketing ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michelle J. White

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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