Consumption, Debt, and Portfolio Choice: Testing the Effects of Bankruptcy Law

Andreas Lehnert and Dean M. Maki

Feb. 2005

Abstract

Consumer bankruptcy laws, which vary across states and over time, permit debtors to keep assets below a statutory exemption while debts are forgiven. High exemptions distort household portfolio decisions and make default less costly, but they also provide a crude form of consumption insurance. We combine information on state-level bankruptcy laws with the Consumer Expenditure Survey from 1984--1999. We find that higher exemptions are associated with (1) Higher bankruptcy rates, (2) Households that are more likely to simultaneously hold low-return liquid assets and owe high-cost unsecured debt, and (3) Slightly better consumption insurance for renters and worse consumption insurance for homeowners.

Journal of Economic Literature classification numbers:

H73, H31, K00, D1

Keywords:

Bankruptcy law, household debt, portfolio puzzle, consumption

Full Text:

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• 1544 kb postscript file
• 344 kb compressed source archive

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Last Modified: Wed Mar 2 19:06:50 GMT 2005

Created By: Andreas W. Lehnert <Andreas@marginalq.com>