Using elasticities to derive optimal bankruptcy exemptions

Arbeitspapier

This paper studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting. I show that, in a large class of economies, knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal, or should be increased or decreased. These variables are: the sensitivity to the exemption level of the interest rate schedule offered by lenders to borrowers, the borrowers' leverage, the borrowers' bankruptcy probability, and the change in bankrupt borrowers' consumption. An application of the framework to US data suggests that the optimal bankruptcy exemption is higher than the current average bankruptcy exemption, but of the same order of magnitude.

Object Details

• ISBN: 978-92-95081-56-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 26

Classification and Topics

• Classification: Wirtschaft ; Incomplete Markets ; Macroeconomics: Consumption; Saving; Wealth ; Household Saving; Personal Finance
• Subject: bankruptcy ; default ; sufficient statistics ; unsecured credit ; general equilibrium with incomplete markets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dávila, Eduardo
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2016

Further information

• DOI: doi:10.2849/303779
• Handle: http://hdl.handle.net/10419/193533
• Last update: 10.03.2025, 11:43 AM CET