Determinants of consumer bankruptcy: Evidences from the Panel Study of Income Dynamics (PSID), 1984–1995
Abstract
The rising consumer bankruptcy trend since the mid-1980's led to the revision of the U.S. bankruptcy statutes in 1999. The present study examines the determinants of the propensity to file bankruptcy between 1984 and 1995, and compares their relative contribution across time. A panel of 5,864 debt holders was drawn from the Panel Study of Income Dynamics (PSID) 1984–1995. A conceptual model of bankruptcy decision was developed based on the intertemporal utility maximization theory, social psychological theory on social stigma, and the findings of previous studies on consumer bankruptcy trends. A type of survival analysis, the discrete-time logit analysis, is employed for the model estimation. The major findings of this study can be summarized as follows: (1) The results of the discrete-time logit analysis show that higher financial benefit from filing bankruptcy, lower repayment ability, and demographic characteristics proxying higher consumption needs and credit constraint increase the probability of filing bankruptcy. (2) Variables proxying for lower bankruptcy stigma significantly increase the bankruptcy probability, after controlling for risk-related variables. (3) The opt-out status of the state bankruptcy laws significantly affects the bankruptcy probability. (4) The results of the split-sample model and the pooled model indicate that different sets of variables affect the bankruptcy probability across time, and increasing role of less risky borrowers and decreasing role of more risky borrowers contributing to the 1990's bankruptcy. The findings of this study suggest (1) no serious sign of abuse in the bankruptcy system, but evidences supporting the problem of unequal treatment of the bankruptcy filers among different states, (2) increasing challenges in the risk evaluation methods for the credit industry, (3) the needs for targeting the financial education focus on the households with higher financial vulnerability as well as on more general population.
Degree
Ph.D.
Advisors
Feinberg, Purdue University.
Subject Area
Economics|Finance|Banking|Law
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