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Personal Bankruptcy and Credit Market Competition


  • Dick is with the Department of Economics, INSEAD Business School. Lehnert is at the Board of Governors of the Federal Reserve System. The opinions expressed do not necessarily reflect those of the Federal Reserve System. The authors would like to thank Anthony Cho, Erik Hembre, Sarita Subramanian, and Kristin Wilson for excellent research assistance, and Jean Dermine, Karen Dynan, Denis Gromb, Erik Hurst, Augustin Landier, Evren Örs, Joel Peress, Nick Souleles, Victor Stango, Phil Strahan, Tim Van Zandt, and participants at various seminars and conference presentations for their comments and suggestions. All errors are our responsibility.


We document a link between U.S. credit supply and rising personal bankruptcy rates. We exploit the exogenous variation in market contestability brought on by banking deregulation—the relaxation of entry restrictions in the 1980s and 1990s—at the state level. We find deregulation explains at least 10% of the rise in bankruptcy rates. We also find that deregulation leads to increased lending, lower loss rates on loans, and higher lending productivity. Our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology, allowing for new credit extension to existing and previously excluded households.

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