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

Eva Maria Berger Steiger

Papers on Strategic Interaction from Max Planck Institute of Economics, Strategic Interaction Group

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 (search for similar items in EconPapers)
JEL-codes: D18 D91 G33 K35 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-09
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-law
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