Understanding Bankruptcy

Understanding Bankruptcy

Despite the fact that over 34 million individuals and businesses have used the federal bankruptcy law since 1898, researchers and policymakers interested in studying the causes and consequences of bankruptcy can only access detailed information about just a few hundred bankrupt households and virtually no bankrupt businesses. Because of this paucity of data on the finances of people with bankruptcy filings, economists do not have clear understanding of how financial crises and bankruptcy and credit fit together. For example, while there is fairly strong evidence that having a bankruptcy law is essential to long-run growth at the national level, we do not know beyond that whether there are aspects of bankruptcy or using the bankruptcy law that can enhance growth.

To rectify this problem, I am currently spearheading a project that aims to stimulate interdisciplinary research on the causes and consequences of bankruptcy and the history of credit markets by creating an extensive database detailing personal bankruptcies and business bankruptcies between 1898 and 1978. Specially, my collaborators and I are in the process of photographing key documents from a sample of cases filed under the bankruptcy laws between 1898 and 1978 through a partnership with the National Archives. From those documents, we are constructing a data set that will then be distributed for widespread use through the Inter-university Consortium for Political and Social Research (ICPSR).

With the first of these data, we are working to answer questions like the following:

  • To what extent did the implementation of Medicare reduce bankruptcy rates among those eligible?
  • To what extent did bankruptcy rates among men and women converge between 1940 and 2000?
  • What are the origins of modern racial disparities in the use of the bankruptcy law?
  • Does the slow resolution of bankruptcy cases stall economic recovery after a downturn?
  • How many filers for bankruptcy could have paid their unpaid debts? How has so-called strategic filing changed over time?

In Labor Economics, students will learn some of the tools that economists use to analyze questions such as these. For example, the launch of Medicare in 1966 significantly altered the tradeoffs between work and retirement: Workers who had previously been able to get health insurance only through continued work could get it through Medicare. Students in labor economics will learn how to carefully model the changes in budget constraints that occur with the introduction of new government policies, and how these changes alter consumer’s incentives to work, save, borrow, and spend money on services such as healthcare. These choices subsequently have long term consequences on such things as bankruptcy rates and even health outcomes, which the students will get experience estimating using econometric techniques from the field of Labor Economics.

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