“Bankruptcy Reform and Foreclosure Crisis During the Great Recession” (pdf)
Between the first quarter of 2007 and the last quarter of 2009, the average price for U.S. single-family houses fell by 26%. During the same period, the foreclosure rate rose on average by 1.3 percentage points in U.S. states where the percentage fall in housing prices and the 2009 unemployment rates were close to national levels. This paper investigates the impact of the 2005 bankruptcy reform law on this explosive rise in the foreclosure rate. Prior to the bankruptcy reform law, U.S. households in bankruptcy had to repay their unsecured debts only up to the amount of their non-exempt home equity. The 2005 bankruptcy reform law requests that above-median income earners repay their unsecured debts in bankruptcy up to the maximum between their non-exempt home equity and 5 years of disposable income. To assess the quantitative impact of the bankruptcy reform law on the foreclosure crisis, I model a life-cycle economy in which households face idiosyncratic income and expense risks; they access homeownership by entering into 30-year fixed interest rate mortgage contracts with a default option; they smooth consumption by borrowing on a second mortgage market and on an unsecured credit market; and they discharge unsecured debts through a bankruptcy system that mimics key features of both Chapter 7 and Chapter 13 of the U.S. bankruptcy code. My results show that the reform lowers borrowing interest rates and raises the opportunity cost of bad credit, thereby making households less likely to default on both mortgage and unsecured markets. I find that the three year foreclosure rate would have been 0.24 points higher during the period 2007-2009, had the bankruptcy reform law not taken place prior to the fall of housing prices. In other words, if the housing bust had occurred in the pre-bankruptcy reform world, then an additional 120,000 houses would have been foreclosed during the period 2007-2009. This result comes in stark contrast to suggestions from previous research that the bankruptcy reform has pushed toward a higher foreclosure rate.
A Political Economy Theory of Growth (pdf)
The standard neoclassical growth model predicts that developing economies will eventually catch up with leading economies. While good performances from Asian countries support the standard neoclassical growth model, economic stagnation in Sub-Saharan Africa and Latin America calls for a different theory that is capable of explaining both growth miracles and growth tragedies. This paper shows that that a high degree of patience in the preferences of citizens and politicians and the ability of citizens to replace a politician in power are key ingredients for economic growth. I characterize the necessary conditions for growth to occur in a context where technological progress is available and free, but requires the approval of self-interested politicians to be adopted. In the model proposed, when politicians in power have a low discount factor, they find it optimal to stop technological progress in exchange for static rewards that the representative citizen does not control. The paper predicts that everything else equal, economies that are the most likely to grow are those with the strongest political institutions: the lowest probabilities of occurrence of a coup d'etat and the lowest probabilities of falling in an absorbing state of dictatorship. Consistently with empirical facts on growth, the relationship predicted between dictatorship and economic growth by the model is a non-linear one: given a probability of falling in the state of dictatorship, the occurrence of growth depends on the discount factor of citizens. The paper also shows that even when the economy is already growing as a dictatorship, a one-shot transition to democracy is still desirable to citizens as it reduces the payoffs that are necessary to provide dynamic incentives to politicians in power.
The standard neoclassical growth model predicts that developing economies will eventually catch up with leading economies. While good performances from Asian countries support the standard neoclassical growth model, economic stagnation in Sub-Saharan Africa and Latin America calls for a different theory that is capable of explaining both growth miracles and growth tragedies. This paper shows that that a high degree of patience in the preferences of citizens and politicians and the ability of citizens to replace a politician in power are key ingredients for economic growth. I characterize the necessary conditions for growth to occur in a context where technological progress is available and free, but requires the approval of self-interested politicians to be adopted. In the model proposed, when politicians in power have a low discount factor, they find it optimal to stop technological progress in exchange for static rewards that the representative citizen does not control. The paper predicts that everything else equal, economies that are the most likely to grow are those with the strongest political institutions: the lowest probabilities of occurrence of a coup d'etat and the lowest probabilities of falling in an absorbing state of dictatorship. Consistently with empirical facts on growth, the relationship predicted between dictatorship and economic growth by the model is a non-linear one: given a probability of falling in the state of dictatorship, the occurrence of growth depends on the discount factor of citizens. The paper also shows that even when the economy is already growing as a dictatorship, a one-shot transition to democracy is still desirable to citizens as it reduces the payoffs that are necessary to provide dynamic incentives to politicians in power.