Economic Quarterly

2004

 

Spring 2004

Shame As It Ever Was: Stigma and Personal Bankruptcy

Kartik B. Athreya

Many believe that bankruptcy was more painful in the past than now and that the stigma associated with bankruptcy has declined. But a model in which bankruptcy affects both demand and supply in the unsecured credit market suggests otherwise. The model shows that a decrease in stigma, while leading to increases in bankruptcy rates, yields implications for the growth of household debt and loss rates for unsecured loans that are flatly counterfactual. Moreover, the model shows that recent reductions in the transactions costs of intermediating unsecured credit can partially account for the simultaneous rise in both bankruptcy rates and debt levels. Therefore, stigma certainly is insufficient and perhaps unnecessary in explaining bankruptcy and unsecured credit market behavior over the 1990s.

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