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Using elasticities to derive optimal bankruptcy exemptions. No 26 / October 2016
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Using elasticities to derive optimal bankruptcy exemptions. No 26 / October 2016

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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.
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ISSN 2467-0677
ISBN 978-92-95081-56-7
DOI 10.2849/303779
Katalognummer DT-AD-16-026-EN-N
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ISSN 2467-0677 ISBN 978-92-95081-56-7 DOI 10.2849/303779 Katalognummer DT-AD-16-026-EN-N
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