Posted by Todd Zywicki:
Institutions, Incentives, and Consumer Bankruptcy Reform:
The working paper of my new article "Institutions, Incentives, and
Consumer Bankruptcy Reform" is now available. You can download it from
[1]SSRN or [2]BEPress. This is the article of mine that was referenced
to yesterday in [3]Leslie Eaton's article in the New York Times on the
bankruptcy reform legislation.
Here's the 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 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=681483
2. http://law.bepress.com/gmulwps/gmule/art21/
3. http://www.nytimes.com/2005/03/13/weekinreview/13eato.html?pagewanted=1
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