Cheaper credit, more bankruptcies

Personal bankruptcies in the United States have increased dramatically,
rising from 1.4 per thousand working age population in 1970 to 8.5 in
2002.  We use a heterogeneous agent life-cycle model with competitive
financial intermediaries who can observe households’ earnings, age and
current asset holdings to evaluate several commonly offered
explanations.  We find that increased uncertainty (income shocks,
expense uncertainty) cannot quantitatively account for the rise in
bankruptcies.  Instead, the rise in filings appears to mainly reflect
changes in the credit market environment.  We find that credit market
innovations which cause a decrease in the transactions cost of lending
and a decline in the cost of bankruptcy can largely accounting for the
rise in consumer bankruptcy.  We also argue that the abolition of usury
laws and other legal changes are unimportant.

Here is the paper.  Here are non-gated versions.