STRATEGIC OR NONSTRATEGIC: THE ROLE OF FINANCIAL BENEFIT IN BANKRUPTCY
Zhang Shuoxun*, Sabarwal Tarun, and Gan Li
Economic Inquiry, 2015 April
A partial test for strategic behavior in bankruptcy filing may be formulated by testing whether consumers manipulate their debt and filing decision jointly, or not: that is, testing for endogeneity of financial benefit and the bankruptcy filing decision. Using joint maximum likelihood estimation of an extended discrete choice model, test results are consistent with nonstrategic filing: financial benefit is exogenous to the filing decision. This result is confirmed in two different datasets (Panel Study of Income Dynamics and Survey of Consumer Finances). This result is consistent with an ex ante low net gain from a bankruptcy filing; a type of “rational inattention” to rare events such as bankruptcy.
Gan Li, Hernandez Manuel, Zhang Shuoxun*
Economic Modelling, 2021
Consumer bankruptcy can serve as insurance against large financial shocks but may also provide an opportunity for deliberate use. This paper proposes and implements a model to test for the coexistence of heterogeneous filing behaviors in the bankruptcy decision. We identify two filing behaviors using data from the United States. One group can be associated with individuals who do not intend to deliberately use the bankruptcy law in the absence of an adverse event, while the second group is more consistent with a “strategic” behavior that exhibits a higher filing probability and financial benefit from filing. The larger prevalence of the first group supports the insurance function of bankruptcy. We further show that the model can help to better identify eventual filers compared to standard models that do not allow for different filing behaviors. The proposed model can be easily extended to assess heterogeneous behaviors in credit and insurance markets.