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Inequality, bankruptcy and the macroeconomy

Rodano, Giacomo (2011) Inequality, bankruptcy and the macroeconomy. PhD thesis, London School of Economics and Political Science.

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This thesis examines the determinants inequality and its effects on macroeconomic outcomes, and in particular the economic effects of bankruptcy law. The first two chapters are joint work with Jochen Mankart. In the first chapter, we examine the effects of Chapter 7 of the US bankruptcy law on entrepreneurs. Entrepreneurs are subject to production risk. They can borrow and if they fail they can default on their debt. We examine the optimal wealth exemption level and the optimal credit market exclusion duration in this environment. In the second chapter, we introduce secured credit, in addition to unsecured credit in a model that is similar to the one in the first chapter. Secured credit lowers the cost of a generous bankruptcy regime because agents who are rationed out of the unsecured credit market can still obtain secured credit. Therefore, the optimal exemption level is very high. In the third chapter, I estimate stochastic process for earnings of Italian individuals. I find that individual’s earnings present statistically significant heterogeneity both in levels and in growth rates that is determined before the beginning of economic activity. In the fourth chapter, I analyze the quantitative effects of introducing immediate debt discharge (fresh start) in the procedures of personal bankruptcy law on the saving and default decisions of Italian household. I find that introducing fresh start in the Italian bankruptcy law would worsen credit conditions, without almost any benefit in terms of better insurance. The fifth chapter is joint work with Emanuele Tarantino and Nicolas Serrano-Velarde. In this chapter we exploit the recent reform of bankruptcy law in Italy to analyze the effects of bankruptcy regulation on the cost of credit. We find that strengthening firms’ rights to renegotiate outstanding deals with creditors increased the costs of funding, while simplifying the procedure of liquidation decreased the costs of funding. In the sixth chapter, I show that credit market imperfections are not necessary to generate an individual poverty trap.

Item Type: Thesis (PhD)
Additional Information: © 2012 Giacomo Rodano
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Ghatak, Maitreesh and Michaelides, Alex

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