Ex-Ante vs. Ex-Post Efficiencyin Personal Bankruptcy Proceedings

Amidst a sharp increase in household debt levels, many countries have substantially reformedtheir consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S.and European bankruptcy regulations and then evaluate these mechanisms within a hidden actionmodel. I analyze the consumer’s incentives prior to distress and during a ’period of good conduct’following bankruptcy, appraising the capacity of existing regulations to implement those conflictingobjectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post,the prospect of debt release also distorts the debtor’s choices prior to distress. I propose alternativeregulations that provide superior incentives, minimizing the overall distortions at both dates. Anumerical example illustrates the findings.