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Fresh Start or Head Start? The Effects of Filing for Personal Bankruptcy on Work Effort

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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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Authors and Affiliations

  1. Division of Research and Statistics, Stop 89, Board of Governors of the Federal Reserve System, Washington, DC, 20551, USA

    Song Han

  2. Department of Research, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA, 19106, USA

    Wenli Li

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  1. Song Han
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  2. Wenli Li
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Correspondence to Song Han.

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Han, S., Li, W. Fresh Start or Head Start? The Effects of Filing for Personal Bankruptcy on Work Effort. J Finan Serv Res 31, 123–152 (2007). https://doi.org/10.1007/s10693-006-0001-0

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  • DOI: https://doi.org/10.1007/s10693-006-0001-0

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