Posted by Todd Zywicki:
Institutions, Incentives, and Consumer Bankruptcy Reform:
I have just launched my latest article on the seas of the law review
submission process as well. It is "Institutions, Incentives, and
Consumer Bankruptcy Reform." It is in the process of being posted as a
working paper and I will let you know when it is available.
This article builds on prior work of mine on the consumer bankruptcy
crisis in the Northwestern Law Review and the Michigan Law Review.
This article builds on my forthcoming article in the Northwestern Law
Review, �An Economic Analysis of the Consumer Bankruptcy Crisis� which
concludes that the upward trend in consumer bankruptcy filings over
the past twenty-five years cannot be explained by the traditional
model of consumer bankruptcy filings (working paper [1]here). This
article also builds on my prior article in the Michigan Law Review,
entitled �The Past, Present, and Future of Bankruptcy Law in America�
which explores the intellectual foundations and political economy of
the making of bankruptcy legislation in America (working paper
[2]here).
This article caps this trilogy by proposing a new model of consumer
bankruptcy that examines changes in the instiutions and incentives for
consumer bankruptcy filings over the past 25 years. Thus, where
"Economic Analysis of the Consumer Bankruptcy Crisis" was largely a
critique of the existing model, this is my effort to provide
alternative model that I believe better explains the trends of the
past 25 years and can guide future policy-making. In addition, as I
describe in "Past, Present, and Future" the traditional model provided
the intellectual foundation for the 1978 Bankruptcy Code. The model
that I describe in my current article provides an intellectual
foundation for much of the current bankruptcy reform agenda, and thus
provides the first intellectual foundation for the bankruptcy reform
legislation. The reform legislation, I believe, marks a fundamental
sea change in the direction of American bankruptcy law, and I think it
is important to understand the intellectual foundation for that change
of direction. As many of you know, I have been an advisor to the
Senate and House Judiciary Committees for several years on the
bankruptcy reform legislation, so I think I have gained some insight
into the intellectual foundation of the reform legislation.
Here's the Abstract:
ABSTRACT Consumer bankruptcy filing rates have soared during the
past 25 years. From 225,000 filings in 1979, consumer bankruptcies
topped 1.5 million during 2004. This relentless upward trend is
striking in light of the generally high prosperity, low interest
rates, and low unemployment during that period. This anomaly of
ever-upward bankruptcy filing rates during a period of economic
prosperity had spurred calls to reform the Bankruptcy Code to place
new conditions on bankruptcy relief. Although bankruptcy reform has
drawn broad bipartisan support on Capitol Hill, these proposals
have proven controversial within the academy. Critics have argued
that these reforms are unnecessary and punitive, and that private
market adjustments such as higher interest rates and more
restrictive credit rationing are suitable policy responses.
Scholars have previously identified two models of the consumer
bankruptcy process, the traditional �distress� model and the
economic �incentives� model. Neither, however, can explain the
observed bankruptcy filing patterns of recent decades. This article
offers a new model of consumer bankruptcy rooted in New
Institutional Economics that explains the rise in consumer
bankruptcy filings as reflecting changes in the institutions,
incentives, and constraints surrounding the consumer bankruptcy
filing decision. It is argued that this new model of consumer
bankruptcy that is both theoretically and empirically superior to
the traditional model.
This article identifies three institutional factors that can
explain the observed rise in bankruptcy filings over the past
several decades: (1) A change in the relative economic costs and
benefits associated with filing bankruptcy; (2) A change in social
norms regarding bankruptcy; and (3) Changes in the nature of
consumer credit, toward more national and impersonal forms of
consumer credit. It is argued that all of these factors tend to
increase the incentives for filing bankruptcy or reduce the
constraints imposed on filing bankruptcy. The result has been to
increase the equilibrium level of bankruptcy filings in America.
Finally, the article briefly discusses some policy implications of
the model presented here, focusing most specifically on the
proposals contained in the Bankruptcy Reform Act that Congress is
again considering, but also addressing more far-reaching proposals,
such efforts to reverse changes in social norms or proposals to
allow contracting-around the mandatory discharge provision of
current law.
References
1. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=587901
2. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=327223
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