Diego Legal-Cañisá Presents at 9th European Search & Matching Network Conference

Tuesday, August 6, 2019

In May 2019, Diego Legal-Cañisá presented his JMP on "Unemployment Insurance and Consumer Bankruptcy" at the 9th European Search & Matching Network Conference in Oslo, Norway, attended by prominent researchers  such as Espen Moen, Guido Menzio, and Rasmus Lentz. Diego says the data shows that Chapter 7 bankruptcy rates across counties and Unemployment Insurance (UI) generosity are negatively correlated. This fact suggests that Chapter 7 bankruptcy and UI are substitute programs and raises the question about the implications of consumer bankruptcy for optimal UI. Diego constructed a model matching main statistics regarding the U.S. unsecured credit and labor markets, including the main features of Chapter 7 Bankruptcy and UI. The model successfully accounts for the negative relationship between bankruptcy rate and UI generosity observed in the data. In the model, for low levels of UI, a more generous UI reduces bankruptcy and allows more debt. As UI keeps increasing, employment falls and lenders react by contracting credit supply. From an ex-ante welfare perspective, an increase in the replacement rate from 50% to 60% is welfare reducing when bankruptcy is allowed but would be welfare increasing without bankruptcy.