The impact of personal bankruptcy on labor supply decisions

The Chapter 7 bankruptcy code was motivated by the notion of a “fresh start,” which was justified in part by the Supreme Court on the grounds that it would encourage work incentives. We ask the question, “how does a fresh start affect labor supply?” This question is explored in the context of a model with job search and bankruptcy choices. The model takes into account both the endogeneity and interdependence of decisions in labor and credit markets. The structural approach allows direct assessment of individuals' labor supply responses given their bankruptcy decisions. We find that Chapter 7 filers on average increase labor supply by 12.3%.