| In this dissertation, we study the question of optimal design of personal bankruptcy law. The bankruptcy code spells out the conditions under which individuals can have some of their debts discharged by order of the bankruptcy court. We focus on the provision of insurance against the risk of personal income or productivity loss as the role for personal bankruptcy in presence of asymmetric information. We consider a general equilibrium model in which insurance is provided through the benefit of discharge of debts, which the bankruptcy law grants to low-income agents. This benefit is funded by interest on undischarged loans paid by high-income agents. In this way, an indirect transfer from high-income to low-income agents is implemented. This transfer provides an implicit insurance payment to the low-income agents. In economies with income publicly observable, it is a necessary condition of the optimal design of the bankruptcy law, we find, that the benefit of discharge be available to low-income agents only. If this condition were absent and discharge were available also to high-income agents, bankruptcy would not be implementing a transfer from high-income to low-income agents, thus failing to fulfil its role. We obtain this result formally by, first, solving the problem of optimal allocation of income risk in a fully specified economic environment with private information and, then, by showing how to design the bankruptcy law optimally, i.e., in a way that guarantees that the optimal allocation is obtained as an equilibrium allocation in a model with borrowing, lending, and discharge regulated by bankruptcy law. In the first essay of this dissertation, we characterize an optimal bankruptcy code in an economy in which income is not publicly observable. The optimal bankruptcy code consists of a single condition that restricts the amount of assets that bankrupt agents can protect from the creditors. In essay two, we show that multiple discharge procedures are needed for optimality of a bankruptcy code when private information is present before the resolution of uncertainty. In essay three, we study a production economy and show how bankruptcy can efficiently provide insurance against the risk of low individual productivity. |
