Household Debt Overhang and Unemployment

Personal bankruptcy is pervasive in the U.S.—about one in 10 Americans will declare bankruptcy in his lifetime.1 Under the U.S. bankruptcy code, households are protected by limited liability. That is, they can discharge their debt and still keep a substantial amount of their assets. Such limited-liability protection distorts the incentives of indebted households, just as it distorts the incentives of indebted firms in corporate finance. In our forthcoming paper,  we investigate how this distortion can affect the labor market. In particular, we ask the following questions. How does limited-liability debt distort household labor supply, and how does this affect aggregate … Read more