Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193533
Authors: 
Dávila, Eduardo
Year of Publication: 
2016
Series/Report no.: 
ESRB Working Paper Series 26
Abstract: 
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.
Subjects: 
bankruptcy
default
sufficient statistics
unsecured credit
general equilibrium with incomplete markets
JEL: 
D52
E21
D14
Persistent Identifier of the first edition: 
ISBN: 
978-92-95081-56-7
Document Type: 
Working Paper

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