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...un effect of the 2001 tax rebate, because we have too little data after the 2008 rebates. 23The variable captures the share of adults in the zip code whose fico credit score was 660 or lower in 1996 (=-=Mian and Sufi, 2009-=-). We are extremely grateful to Atif Mian and Amir Sufi for assistance in acquiring these data. 16with the smallest total rebate effect. We emphasize, however, that none these differences across the ...

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...the literature on the economic effects of these constraints. Liquidity constraints have been shown to cause excessive consumption responses to transitory changes in income (Shapiro and Slemrod, 2003; =-=Souleles, 1999-=-; Hsieh, 2003; Stephens, 2003), limit investment in human capital (Dynarski, 2003), and amplify the behavioral response to unemployment insurance benefits (Chetty, 2008). 2 Additionally, liquidity con...

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...ss than one percent) file under chapter 11. 2 sively to transitory changes in income (Shapiro and Slemrod, 2003; Souleles, 1999; Hsieh, 2003; Stephens, 2003); to restrict entry into entrepreneurship (=-=Hurst and Lusardi, 2004-=-); and to limit investment in human capital (Dynarski, 2003). Liquidity constraints may also play a role in the effects of unemployment insurance (Hansen and İmrohoroğlu, 1992; Chetty, 2008). These ...

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...r bankruptcy. Our paper is also part of a growing literature studying the economic effects of tax rebates. Most related papers focus on the effects of the tax rebates on consumption and expenditures (=-=Johnson et al., 2006-=-; Agarwal et al., 2007; Shapiro and Slemrod, 2003; Bertrand and Morse, 2009), while other studies have estimated the effect of the tax rebates on mortality and morbidity (Evans and Moore, 2011; Gross ...

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...tions are governed by both federal and state bankruptcy law. Exemption levels vary widely by state and have been relatively stable at the state level since the early twentieth century (Mahoney, 2010; =-=Gropp et al., 1997-=-). 11 Bankruptcy in this model is a composite of Chapter 7 and Chapter 13 bankruptcy. While in practice Chapter 13 filers repay their debts based on a three to five year schedule, our framework can ca...

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...e (Shapiro and Slemrod, 2003; Souleles, 1999; Hsieh, 2003; Stephens, 2003), limit investment in human capital (Dynarski, 2003), and amplify the behavioral response to unemployment insurance benefits (=-=Chetty, 2008-=-). 2 Additionally, liquidity constraints likely play an important role in the optimal design of social insurance programs (Chetty, 2008; Hansen and ˙ Imrohoro˘glu, 1992). Since consumer bankruptcy fun...

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...s have been shown to cause excessive consumption responses to transitory changes in income (Shapiro and Slemrod, 2003; Souleles, 1999; Hsieh, 2003; Stephens, 2003), limit investment in human capital (=-=Dynarski, 2003-=-), and amplify the behavioral response to unemployment insurance benefits (Chetty, 2008). 2 Additionally, liquidity constraints likely play an important role in the optimal design of social insurance ...

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...r is also part of a growing literature studying the economic effects of tax rebates. Most related papers focus on the effects of the tax rebates on consumption and expenditures (Johnson et al., 2006; =-=Agarwal et al., 2007-=-; Shapiro and Slemrod, 2003; Bertrand and Morse, 2009), while other studies have estimated the effect of the tax rebates on mortality and morbidity (Evans and Moore, 2011; Gross and Tobacman, 2011). T...

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... period 1 due to the high marginal utility of consumption in period 1. 6Households file for bankruptcy when it is financially beneficial to do so, even if they have the ability to repay their debts (=-=Fay et al., 2002-=-). Specifically, households decide whether and when to file by maximizing consumption in period 2 subject to liquidity constraints. If a household declares bankruptcy, it pays a fixed filing fee, c, a...

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...n the economic effects of these constraints. Liquidity constraints have been shown to cause excessive consumption responses to transitory changes in income (Shapiro and Slemrod, 2003; Souleles, 1999; =-=Hsieh, 2003-=-; Stephens, 2003), limit investment in human capital (Dynarski, 2003), and amplify the behavioral response to unemployment insurance benefits (Chetty, 2008). 2 Additionally, liquidity constraints like...

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...on how the rebates actually stimulated consumption. Our results therefore shed Previous studies have concluded that households consumed a moderate-to-large share of the rebates (Johnson et al., 2006; =-=Parker et al., 2010-=-). Our results suggest that many households used the rebates to file for bankruptcy. Moreover, households may increase consumption by a great deal after bankruptcy (Filer and Fisher, 2005; Zhu, 2011)....

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... welfare consequences of entrance fees are theoretically ambiguous. On the one hand, fees may act as an ordeal mechanism, screening out households who stand to gain little from filing for bankruptcy (=-=Nichols and Zeckhauser, 1982-=-). On the other hand, the fees may prevent liquidity-constrained households from filing for bankruptcy, and those households may benefit the most from filing. In this paper, we provide a first attempt...

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...as the costs of filing are greater than the value of the rebates. The value of the rebates were at most $600 in 2001 and $1,200 in 2008. In contrast, average bankruptcy costs are estimated at $1,500 (=-=Sullivan et al., 2001-=-; GAO, 2008). 8 Let Y be the share of households that are unable to file at time 1 but can file at time 2: Y = ∫ c c−I f(W )dW. Since unconstrained filers are indifferent between filing in period 1 ve...

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...lves. In this sense, reducing the barriers to bankruptcy may be a particularly effective economic stimulus, as the timely discharge of household debt may increase household consumption substantially (=-=Mian et al., 2011-=-). The remainder of the paper proceeds as follows. The next section provides background on the tax rebates and describes the bankruptcy data that we have compiled. Section 3 outlines a theoretical mod...

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...welfare consequences of entrance fees are theoretically ambiguous. On the one hand, fees may act as an ordeal mechanism, screening out households that stand to gain little from filing for bankruptcy (=-=Nichols & Zeckhauser, 1982-=-). On the other hand, the fees Received for publication April 23, 2012. Revision accepted for publication February 25, 2013. * Gross: Mailman School of Public Health, Columbia University and NBER; Not...

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...d our paper contributes to the literature on the economic effects of these constraints. Liquidity constraints have been shown to cause excessive consumption responses to transitory changes in income (=-=Shapiro and Slemrod, 2003-=-; Souleles, 1999; Hsieh, 2003; Stephens, 2003), limit investment in human capital (Dynarski, 2003), and amplify the behavioral response to unemployment insurance benefits (Chetty, 2008). 2 Additionall...

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... broadly consistent with recent survey evidence on the “financial fragility” of American households, suggesting that roughly one quarter of Americans would not be able to raise $2,000 within 30 days (=-=Lusardi et al., 2011-=-). To interpret our results, we develop a simple model of consumer bankruptcy. The model predicts that tax rebates should only affect the filing decisions of liquidity-constrained households. Moreover...

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...he economic effects of tax rebates. Most related papers focus on the effects of the tax rebates on consumption and expenditures (Johnson et al., 2006; Agarwal et al., 2007; Shapiro and Slemrod, 2003; =-=Bertrand and Morse, 2009-=-), while other studies have estimated the effect of the tax rebates on mortality and morbidity (Evans and Moore, 2011; Gross and Tobacman, 2011). To our knowledge, no studies 2By contrast, Hurst and L...

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...c effects of these constraints. Liquidity constraints have been shown to cause excessive consumption responses to transitory changes in income (Shapiro and Slemrod, 2003; Souleles, 1999; Hsieh, 2003; =-=Stephens, 2003-=-), limit investment in human capital (Dynarski, 2003), and amplify the behavioral response to unemployment insurance benefits (Chetty, 2008). 2 Additionally, liquidity constraints likely play an impor...

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...ditures (Johnson et al., 2006; Agarwal et al., 2007; Shapiro and Slemrod, 2003; Bertrand and Morse, 2009), while other studies have estimated the effect of the tax rebates on mortality and morbidity (=-=Evans and Moore, 2011-=-; Gross and Tobacman, 2011). To our knowledge, no studies 2By contrast, Hurst and Lusardi (2004) do not find clear evidence that liquidity constraints restrict entry into entrepreneurship. 3have focu...

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...the households filing in the weeks after the rebates were distributed had higher total liabilites and debt-toincome ratios. To interpret our results, we develop a simple model of consumer bankruptcy (=-=Wang and White, 2000-=-). Motivated by the relevant case law regarding how bankruptcy courts treated the tax rebates, the model suggests that the tax rebates should only affect the filing decisions of liquidity-constrained ...

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...e centers over whether bankruptcies are primarily caused by unexpected negative shocks (Himmelstein et al., 2009; Fay et al., 2002). More recent work has emphasized the importance of myopic behavior (=-=Hankins et al., 2011-=-; Zhu, 2011). By contrast, our results suggest than an important (and overlooked) determinant of bankruptcy may be the ability of households simply to afford the fees. Lastly, the concept that liquidi...

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...n et al., 2006; Parker et al., 2010). Our results suggest that many households used the rebates to file for bankruptcy. Moreover, households may increase consumption by a great deal after bankruptcy (=-=Filer and Fisher, 2005-=-; Zhu, 2011). Thus our results suggest that—for some households—the rebates may have increased short-run consumption by more than the amount of the rebates themselves. In this sense, reducing the barr...

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...2001 and 2008 and were specifically designed to stimulate the economy during the 2 Liquidity constraints also affect subprime mortgage defaults in the months following lump-sum property tax payments (=-=Anderson & Dokko, 2011-=-). By contrast, Hurst and Lusardi (2004) do not find clear evidence that liquidity constraints restrict entry into entrepreneurship. Figure 1.—Bankruptcy Districts in Sample The 81 bankruptcy district...

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...practice, exemptions are governed by both federal and state bankruptcy law. Exemption levels vary widely by state and have been relatively stable at the state level since the early twentieth century (=-=Mahoney, 2010-=-; Gropp et al., 1997). 11 Bankruptcy in this model is a composite of Chapter 7 and Chapter 13 bankruptcy. While in practice Chapter 13 filers repay their debts based on a three to five year schedule, ...

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...t al., 2010). Our results suggest that many households used the rebates to file for bankruptcy. Moreover, households may increase consumption by a great deal after bankruptcy (Filer and Fisher, 2005; =-=Zhu, 2011-=-). Thus our results suggest that—for some households—the rebates may have increased short-run consumption by more than the amount of the rebates themselves. In this sense, reducing the barriers to ban...

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...ees” for bankruptcy increased from an average of $921 before the reform to an average of $1,477 after the reform (GAO, 2008). While there is a divisive debate over these entrance fees (Zywicki, 2005; =-=Mann and Porter, 2010-=-), there exists little empirical research estimating their effects. Unfortunately, economic theory provides little guidance, as the welfare consequences of entrance fees are theoretically ambiguous. O...

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.... Another area of future work is further investigation into the determinants of bankruptcy. A long-running debate centers over whether bankruptcies are primarily caused by unexpected negative shocks (=-=Himmelstein et al., 2009-=-; Fay et al., 2002). More recent work has emphasized the importance of myopic behavior (Hankins et al., 2011; Zhu, 2011). By contrast, our results suggest than an important (and overlooked) determinan...

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..., 2006; Agarwal et al., 2007; Shapiro and Slemrod, 2003; Bertrand and Morse, 2009), while other studies have estimated the effect of the tax rebates on mortality and morbidity (Evans and Moore, 2011; =-=Gross and Tobacman, 2011-=-). To our knowledge, no studies 2By contrast, Hurst and Lusardi (2004) do not find clear evidence that liquidity constraints restrict entry into entrepreneurship. 3have focused on the effect of the t...

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...nseling for filers and raised court fees and paperwork requirements that resulted in a 50% increase in filing and legal fees from an average of $921 before the reform to $1,377 after the reform (U.S. =-=GAO, 2008-=-). While there exists a divisive debate over these entrance fees (Zywicki, 2005; Mann & Porter, 2010), little empirical research has estimated their effects. Moreover, economic theory provides little ...

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...ecks as well as the more severe recession, which likely increased the number of liquidity-constrained households. Our results are consistent with existing evidence on household liquidity constraints (=-=Lusardi et al., 2011-=-), and our paper contributes to the literature on the economic effects of these constraints. Liquidity constraints have been shown to cause excessive consumption responses to transitory changes in inc...

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...e more bankruptcies in 2001 than in 2008; we observe roughly 20,000 each week in 2001 versus 15,000 in 2008. That difference is likely driven by the 2005 passage of the bapcpa (McIntyre et al., 2010; =-=Evans and Lewis, 2008-=-; GAO, 2008). Additionally, Figure 2 demonstrates that bankruptcies are more common during the first week of the month compared with later weeks. Mann and Porter (2010) attribute this pattern to liqui...

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...ssal. Moreover, the rebates were exempt from creditor action for nearly all households, obviating the need for strategic behavior. Note that the average wild card exemption under Chapter 7 is $7,073 (=-=Mahoney, 2012-=-), and 94% of filings in our sample are noasset bankruptcies in which all of the debtor’s assets were exempt. The rebates could not have shifted a large share of households beyond that exemption thres...

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... more liquidity-constrained households. All of these explanations would suggest a larger effect in 2008. Additionally, the BAPCPA dramatically changed the bankruptcy system in the intervening period (=-=McIntyre, Sullivan, & Layton, 2010-=-), raising attorney fees and encouraging households to choose Chapter 13 rather than Chapter 7. The expected effect of these legal changes on the 2008 results is less clear. In contrast to Chapter 7 f...