Economic Quarterly

2001

 

Summer 2001

The Growth of Unsecured Credit: Are We Better Off?

Kartik B. Athreya

Because of current bankruptcy law, the growth in unsecured credit in the two decades since the 1978 Marquette Supreme Court ruling has reduced the average welfare of the poor. This striking conclusion emerges from a theoretical model designed to maximize the benefits of both plentiful unsecured credit and lax bankruptcy law. Even exclusive concern for wealth redistribution provides no self-evident justification for lax bankruptcy law in the face of an expansion in unsecured credit. The forces causing decreases in the welfare of the poor are, first, the role of lax personal bankruptcy law in thwarting debtors from credibly committing to repay debts, second, the premium that the poor must pay to borrow on unsecured credit markets, and third, the welfare loss from the imposition of deadweight bankruptcy penalties.



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