Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

31 Pages Posted: 1 Aug 2006  

Eva-Maria Steiger

Max Planck Institute of Economics, Strategic Interaction Group

Date Written: August 7, 2006

Abstract

Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer's incentives prior to distress and during a "period of good conduct" following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor's choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.

Keywords: Personal Bankruptcy, Limited Liability, Moral Hazard, Law & Economics

JEL Classification: D18, D91, K35, G33

Suggested Citation

Steiger, Eva-Maria, Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings (August 7, 2006). Available at SSRN: https://ssrn.com/abstract=921540 or http://dx.doi.org/10.2139/ssrn.921540

Eva-Maria Steiger (Contact Author)

Max Planck Institute of Economics, Strategic Interaction Group ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

HOME PAGE: http://www.econ.mpg.de/english/staff/staffpage.php?group=esi&name=steiger

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