Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

In the light of increasing household debt, several countries are substantiallyreforming their consumer bankruptcy regulations. This paperfirst classifies the mechanisms triggered by both U.S. and European bankruptcyregulations. Then, I test these mechanisms within a hidden actionmodel. Here, I analyze the consumers persuasion prior to distress andpost filing period of good conduct, appraising the capacity of the regulationsto implement the efficient choice at both dates and examiningthe interplay. Though the institution of debt release provides adequatebankruptcy regulation ex-post, the prospect of debt release may be liableto distort the debtors choices prior to distress. The proposed regulationprovides superior incentives, minimizing the distortions at both dates. Anumerical example illustrates the findings.