Author : David Lander
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (15 download)
Book Synopsis Household Bankruptcy and Government Transfers by : David Lander
Download or read book Household Bankruptcy and Government Transfers written by David Lander and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on household bankruptcy and government transfers. The first studies how we should model the decision-making process of an indebted household with an option to discharge its debt through U.S. Chapter 7 bankruptcy. The second investigates whether we can implicitly model means-tested government transfers in dynamic economic models using exogenous Markov processes. Finally, the third jointly studies government transfers and bankruptcy policy to evaluate the effect of interactions between these policies on borrowing constraints and welfare.The first chapter studies whether households filing for bankruptcy are strategic, i.e., they file when the financial benefit of filing exceeds the cost, or nonstrategic, i.e., they file when unable to repay their debt. These types differ in their likelihood of filing, hence the distribution of types affects the availability and pricing of consumer credit. I extend a standard heterogeneous agent life-cycle model of household bankruptcy to include both strategic and nonstrategic agents, where these types differ only in terms of their filing decision rule. The proportion of each type is estimated using household-level data from the Panel Study of Income Dynamics. The model enables us to quantify both strategic and nonstrategic bankruptcy filings, and infer the magnitude of the alleged `abuse' of Chapter 7 bankruptcy policy by strategic households. It also provides insights into previous findings in both the structural and reduced-form bankruptcy literature, by estimating the model parameters using simulated method of moments, with target moments taken from previous studies. The main result is that a structural model without nonstrategic agents has difficulty matching key moments, and it generates a significantly larger number of bankruptcy filings where the agents could repay. Consequently, it overstates the extent that Chapter 7 is being `abused', and leads to predictions that exaggerate the effect of the 2005 Bankruptcy Code reforms implemented to curtail abusive filings.The second chapter studies whether it is appropriate to directly estimate a stochastic process for the sum of labour earnings and public transfers, i.e., disposable income. A Monte Carlo experiment is performed to evaluate how accurately this procedure approximates a simulated panel of income, generated by a life-cycle model with transfers in the form of an income floor. I show that means-tested transfer policies are not well-represented by a stationary stochastic process for income with the canonical ``transitory-and-persistent'' AR(1) structure, since means-testing generates age-dependence in the autocovariance structure of income. The consequence, in terms of economic inference, is demonstrated by using the method of simulated moments to estimate key behavioural parameters (i.e., the discount factor and coefficient of risk aversion), with target moments taken from the baseline model. While the bias of these parameter estimates, relative to the baseline model, is increasing in the income floor, the magnitude and direction of the bias depends on the choice of target moments.The third chapter, undertaken with Russell Cooper, studies the joint effect of a means-tested transfer policy and personal bankruptcy policy on borrowing constraints and welfare. We identify a channel through which transfers can adversely affect consumer welfare, even in the absence of taxes. If the transfer policy increases the likelihood of a household filing for bankruptcy, the subsequent feedback effects on interest rates may lead to tighter borrowing constraints and reduced welfare. This effect can arise when the transfer policy is available to all households, regardless of whether they filed for bankruptcy, but there is limited, stochastic participation in the transfer scheme. A life-cycle model of household bankruptcy with endogenous borrowing constraints and an income floor is employed to quantify this phenomenon. It reveals that the transfer policy causes low-income households to experience tighter borrowing constraints early in the life cycle, and a welfare loss may occur for relatively low values of the income floor, i.e., $3,000 to $4,000.
