TAILIEUCHUNG - Accounting for the Rise in Consumer Bankruptcies by Igor Livshits, James MacGee, Michèle Tertilt

Take for example an investment contract with an annuitisation option where the annuity factor is the same as new annuities offered by the insurer at the time the option is executed. Since the insurer is free to determine the annuity factor, the annuitisation is in substance the formation of a new contract, the terms of which are agreed at the date the option is exercised. The contract cannot therefore be classified as an insurance contract at inception. However, if the terms of the annuity are agreed at the start of the contract or severe constraints are imposed on the insurer in determining the annuity factor at the date the. | Accounting for the Rise in Consumer Bankruptcies by Igor Livshits James MacGee Michèle Tertilt Working Paper 2006-6 September 2006 RBC Financial Group Economic Policy Research Institute EPRI Working Paper Series Department of Economics Department of Political Science Social Science Centre The University of Western Ontario London Ontario N6A 5C2 Canada This working paper is available as a downloadable pdf file on our website http economi centres epri Accounting for the Rise in Consumer Bankruptcies Igor Livshits James MacGee Michele Tertilt September 24 2006 Preliminary Abstract Personal bankruptcies in the United States have increased dramatically rising from per thousand working age population in 1970 to in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households earnings age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty income shocks expense uncertainty cannot quantitatively account for the rise in bankruptcies. Instead stories related to a change in the credit market environment are more plausible. In particular we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant. Keywords Consumer Bankruptcy Uncertainty Credit Markets Stigma. JEL Classifications E21 E44 G18 K35 Livshits Department of Economics University of Western Ontario Social Science Centre London Ontario N6A 5C2 e-mail livshits@ MacGee Department of Economics University of Western Ontario Social Science Centre London Ontario N6A 5C2 e-mail jmacgee@ Tertilt Department of Economics Stanford University 579 Serra Mall Stanford CA 94305-6072 email tertilt@ . We thank Martin Gervais Jeremy Greenwood Karen Pence Jose-Victor .

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