Abstract :
We study the implications of U.S. personal bankruptcy rules for resource allocation and welfare.
Our analysis shows that general equilibrium considerations along with bankruptcy chapter choice
and production matter crucially for the effects of policy reform. Contrary to previous work, we find
that completely eliminating bankruptcy provisions causes significant declines in output and welfare
by reducing capital formation and labor input. Furthermore, subjecting Chapter 7 filers to means
testing, as suggested by recent legislative proposals, would not improve upon current bankruptcy
provisions and, at best, leave aggregate filings, output, and welfare unchanged. However, we do find
that an alternative tightening of Chapter 7, in the form of lower asset exemptions, can increase
economic efficiency.
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