Fresh Start or Head Start? The Effects of Filing for Personal Bankruptcy on Work Effort |
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| Authors: | Song Han Wenli Li |
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| Institution: | (1) Division of Research and Statistics, Stop 89, Board of Governors of the Federal Reserve System, Washington, DC 20551, USA;(2) Department of Research, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, USA |
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| Abstract: | The key feature of the modern US personal bankruptcy law is to provide debtors a financial fresh start through debt discharge.
It has long been believed that the primary goal of the discharge policy is to preserve human capital by maintaining incentives
to work. We provide the first test of this fresh start argument by estimating the effect of personal bankruptcy filing on
work effort using data from the Panel Study of Income Dynamics. Our econometric approach controls for the endogenous self-selection
of bankruptcy filing. We find that filing for bankruptcy does not have a positive impact on annual work hours for bankrupt
households, a result mainly due to the wealth effects of debt discharge.
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| Keywords: | Personal bankruptcy fresh start wealth effect labor supply |
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