Abstract
The ease in mobility of people across the U.S.-Mexico border region provides a natural setting for analyzing the role of economic interdependency on consumer credit outcomes. Since the U.S. and Mexican economies are not entirely synchronized and have different growth rates, the growing Mexican border economy is likely to increase the consumption of U.S. goods and services in the region, and provide additional job opportunities to the U.S. border residents. Thus, the effect of being located at the border (‘border effect’) might reduce default and bankruptcy in the U.S. However, if both economies are nearly perfectly correlated, then the ‘border effect’ is likely to be insignificant. Our results are consistent with the border effect lowering the rate of bankruptcies and mortgage defaults in the U.S. counties that share a border with Mexico. An increase in the level of economic interdependency, as measured by the differential economic growth between Mexican municipalities and their sister U.S. county, decreases the bankruptcy rates in the U.S. border region. Overall, this research helps understand credit risk issues in the U.S.-Mexico border region.
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Notes
BAPCPA’s main purpose was to reduce the abuse of borrower-friendly bankruptcy laws. Some of its important features are that a financially-distressed borrower needs to pass a means-test in order to file under the Chapter 7 procedure. It also requires borrowers to go through credit counseling and a debtor education program before filing for bankruptcy. For the economic effects of BAPCPA, see White (2007), Morgan et al. (2008), and Li et al. (2011). Before BAPCPA, the major reforms in the bankruptcy procedure took place when the Bankruptcy Reform Act of 1978 went into effect; see Nelson (2000) for its impact on bankruptcy filings.
In a more recent study, Ghaddar and Brown (2005) estimate that in 2004 the visitors from Mexico spent around $7 billion in the border counties of California, Texas, and Arizona. They also mention that most of the Mexican travelers enter the U.S. through a Laser visa which allows them to stay in the U.S. up to 30 days and to travel within 25 miles of the border in the case of California, New Mexico and Texas, and 75 miles in the case of Arizona.
Using 10 matching city-pairs of the U.S.-Mexico border region, Hanson (2001) shows that a 10 % increase in export manufacturing in the Mexican border region leads to a 1.1–2 % increase in the employment of the neighboring U.S. border region. In a recently released report on the rankings of Metropolitan Statistical Areas (MSAs) based on job creation, three border MSAs, McAllen, El Paso, and Harlingen ranked 4th, 6th, and 13th, respectively in the entire nation (DeVol et al. 2010).
The reason for reporting this statistic for these two periods is that they coincide with our sample periods for default and bankruptcy.
The next section reports in detail about the construction of U.S county–Mexican municipality(ies) matching pairs.
The literature on the U.S.-Mexico border region does report some negative aspects of the growing economic interaction along the border. For example, the average uncompensated cost at border counties’ hospitals for the year 2000 would have been lower by 3.5 percentage points if the border counties were not located at the border (MGT of America 2002). Similarly, Adkisson and Zimmerman (2004) find some evidence suggesting a negative influence of NAFTA on the retail sales on the U.S. side of the border. Also, car insurance premiums on the U.S. side of the border tend to be higher due to car thefts and the increase in Mexican registered cars without adequate insurance coverage (Miller 1987).
In the case of income for the state of Virginia from the BEA, for 81 counties the data are provided at the individual county-level. For the remaining 53 counties, data are combined in groups of two or more counties. For such counties, we compute the required data using the population data of those counties.
Data for Garnish are as of 2004. Generally, the level of state wage garnishment limit does not change over time. Comparing the wage garnishment limit for 1995 and 2008 from Dawsey and Ausubel (2004) and Dawsey et al. (2009), we find only Iowa has changed its wage garnishment limit from 25 % in 1995 to below 25 % in 2008. By going over Elias et al. (2006) and previous editions, it seems that IA changed its wage garnishment limit to 10 % in 2002.
‘Informal bankruptcy’ refers to instances when borrowers simply walk away from the debt obligations and do not seek remedy from the formal bankruptcy process (Dawsey and Ausubel 2004). Sometimes, a borrower before filing for bankruptcy relocates to a state with borrower-friendly bankruptcy legislation. For a detailed analysis on such ‘forum-shopping’, see Elul and Subramanian (2002).
The counties along the northern border between the U.S and Canada are considered to be a part of the sample of non-border U.S. counties. We identify 66 U.S. counties which share the border with Canada, including four counties which are geographically very close to the U.S. but are connected by water, not land. There is a wide disparity of demographics and local economic conditions within these counties, depending on the location of the county: West (fast growing area more recently), Central (French-speaking Canadians), or East (English-speaking Canadians). We only analyze U.S.-Mexico border counties because they share common features and are more homogenous.
See also Map 1.1 (page 17) and Map 2.1 (page 39) of Anderson and Gerber (2008). As one can see from their Map 2.1, matching a U.S. county with its sister Mexican municipality is not straightforward. For example, San Diego county of CA shares a border with Tijuana and Tecate municipalities of the Mexican state Baja California. At the same time, Tecate and Mexicali municipalities also share a border with Imperial county of CA. In such situations, we use our subjective judgment and assign municipalities accordingly. We ensure that matching municipalities are from the same Mexican state. If, however, the municipality share of the population is too small, we proceeded with the most populated Mexican border municipality to avoid the aggregation problems in computing the weighted averages at the Mexican state-level. The matching pair of Webb county of TX is a special case. Geographically, it shares a border with three Mexican states – Coahuila, Nuevo Leon, and Tamaulipas. We identify three potential matching municipalities for Webb -- Nuevo Laredo, Hidalgo, and Anahuac of Tamaulipas, Coahuila and Nuevo Leon, respectively. To avoid the aggregation problem, we matched Webb county with Nuevo Laredo municipality, because it has 11 % of the state’s population. The other two have 0.0006 % and 0.005 % of the state’s population.
From 1994 to 2010, on average, 69.4 % of quarterly bankruptcy filings were under the Chapter 7 procedure. It was expected that after BAPCPA of 2005, the number of Chapter 7 filings would reduce. However, for the period 2007 to 2010, still around 68 % of filings are under the Chapter 7 procedure (Source: Authors’ calculations using data from the American Bankruptcy Institution (www.abiworld.org)).
As per TrenData, the installment (non-mortgage) loan is a closed-ended credit extended by automobile companies, hospitals, credit unions, banks, etc. However, most of the installment loans are auto loans.
The county-level data on the number of consumer bankruptcy lawyers are manually collected from www.lawyercentral.com, and are as of November 2011.
Specifically, we perform the STATA’s user-written command “abar”. For more information on this command, see Roodman (2006).
For consistency with the Cameron and Trivedi’s analysis, we use the second-order autoregressive process. Our results remain similar with the first-order autoregressive process for the within-panel correlation.
Plumper and Troeger (2007) propose the fixed effects vector decomposition (FEVD) model that efficiently estimates the time-invariant factors in a fixed effects model. We attempted to perform this analysis on our data by running the user-written STATA command “xtfevd”. Unfortunately, due to some unknown technical issues in the program, we were unable to perform this analysis. Some leading authorities on this subject have found surprising results after implementing the FEVD model, and have raised serious questions on its validity (Greene 2012).
For brevity, we only report the coefficients on Border. The detailed tables for each panel data model are available upon request.
Our results remain similar if we include White, Black, and Asian in our analysis.
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We are enormously grateful to the anonymous reviewer for the constructive suggestions which have significantly improved the paper. The encouragement from the Editor (David Musto) on our chosen research question and his comments are also appreciated. We also thank Alexander Baptista, Gregory Elliehausen, Diego Escobari, David Mather, Harald Oberhofer, Leslie Papke, and seminar participants at the University of Texas-Pan American for their suggestions. Some portion of the data collection for this research was completed while Desai was at The George Washington University. Lizeth Marroquin and Khoa Nguyen provided excellent research assistance. Desai is particularly grateful to his wife, Ditina, for painstakingly proofreading all the versions of the manuscript and helping to make it as reader-friendly as possible. We are solely responsible for errors and omissions.
Appendices
Appendix A
Table 6
Appendix B
Table 7
Appendix C
Table 8
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Desai, C.A., Mollick, A.V. On Consumer Credit Outcomes in the U.S.-Mexico Border Region. J Financ Serv Res 45, 91–115 (2014). https://doi.org/10.1007/s10693-012-0154-y
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DOI: https://doi.org/10.1007/s10693-012-0154-y