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Using Elasticities to Derive Optimal Bankruptcy Exemptions

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  • Eduardo Dávila
Abstract
This article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting. In a large class of economies, knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased. These variables are 1. the composition of households’ liabilities, 2. the sensitivity of the credit supply schedule to exemption changes, 3. the probability of filing for bankruptcy with non-exempt assets, and 4. the value given by households to a marginal dollar in different states, which can be mapped to changes in households’ consumption. I recover empirical estimates of the sufficient statistics using U.S. data over the period 2008–16 and find that increasing exemption levels improves overall welfare, although there is substantial variation in estimated welfare gains across U.S. states and income quintiles.

Suggested Citation

  • Eduardo Dávila, 2020. "Using Elasticities to Derive Optimal Bankruptcy Exemptions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 870-913.
    • Handle: RePEc:oup:restud:v:87:y:2020:i:2:p:870-913.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz043
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    2. David Sraer & David Thesmar, 2018. "A Sufficient Statistics Approach for Aggregating Firm-Level Experiments," NBER Working Papers 24208, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Bankruptcy; Default; Sufficient statistics; Unsecured credit; General equilibrium with incomplete markets;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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