Keywords: Labor supply, personal bankruptcy
Abstract: The key feature of the modern U.S. personal bankruptcy law is to provide debtors a
financial fresh start through debt discharge. The primary justification for the discharge
policy is to preserve human capital by maintaining incentives for work. In this paper, we
test this fresh start argument by providing the first estimate of the effect of personal
bankruptcy filing on the labor supply using data from the Panel Study of Income
Dynamics (PSID). Our econometric approach controls for the endogenous self-selection
of bankruptcy filing and allows for dependence over time for the same household.
We find that filing for bankruptcy does not have a positive impact on annual hours
worked by bankrupt households, a result mainly due to the wealth effects of debt
discharge. The finding is robust to a number of alternative model specifications and
sample selections. Therefore, our analysis does not find supporting evidence for the
human capital argument for bankruptcy discharge.
Full paper (277 KB PDF)
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Last update: June 2, 2004