Social Newoks and Pesonal Bankupcy Michelle M. Mille Assisan Pofesso Ruges Business School Depamen of Finance and Economics 1 Washingon Pak, Room 1154 Newak, New Jesey 07102 millem@business.uges.edu (973) 353-5340 Absac While social newoks have been examined in he conex of many economic decisions, his sudy is he fis o examine he ole of social newoks in a household s bankupcy decision. Newoks may affec a household s bankupcy decision in many ways: hey could povide infomaion abou he equied papewok, ecommend an aoney, educe he sigma associaed wih bankupcy, o incease awaeness of is benefis. Using daa fom he Panel Sudy of Income Dynamics (PSID), I exploi couny and acial vaiaion o idenify newok effecs --- my empiical saegy asks whehe being suounded by ohes of he same ace inceases bankupcy use moe fo hose in acial goups wih high filing aes. This mehodology allows me o include boh couny-yea and acial goup fixed effecs in my egessions. The esuls songly confim he impoance of newoks in a household s bankupcy decision. I would like o hank Magae Blume-Kohou, Sacy Dicke-Conlin, Gopi Goda, May E. Hansen, Las J. Lefgen, Fenanda Leie Lopez de Leon, Robe A. Mago, Kahleen McGay, Paulina Oliva, and Robe H. Paick fo hei helpful feedback. All emaining eos ae my own.
1. INTRODUCTION A gowing lieaue documens he impac of social newoks on individual behavio. Pominen examples show, fo example, ha social newoks impac welfae paicipaion (Beand e al., 2000), publically funded penaal cae (Aize and Cuie, 2004), healh cae uilizaion (Dei, 2005), educaion (Calvo-Amengol, Paacchini and Zenou, 2009; Aaonson, 1998), employmen (Beaman, 2012; Topa, 2001), and invesmen decisions (Li, 2009; Duflo and Saez, 2003). In his pape I show ha social newoks also have a significan impac on a household s decision o file fo bankupcy. Using daa fom he 1991-1995 Panel Sudy of Income Dynamics (PSID), I define newoks using a household s couny and acial/ehnic goup his mehodology is simila o Beand e al.(2000), Aize and Cuie (2004) and Dei (2005). My empiical saegy asks whehe being suounded by ohes of he same acial goup inceases bankupcy use moe fo hose in acial goups wih high filing aes. Because my egessions include couny-yea and acial goup fixed effecs, I am able o eliminae omied vaiable bias caused by unobseved neighbohood chaaceisics and unobseved household chaaceisics ha ae coelaed wih ace. To es fo emaining omied vaiable bias I: 1) use an insumenal vaiables appoach, 2) exploe he effec of dopping covaiaes and 3) include household fixed effecs. My esuls wihsand all hee ess. Bankupcy is one of he couny s lages ansfe of wealh pogams. In 2010, ove 1.5 million households filed fo bankupcy. As hese 1.5 million households dischaged moe han $459 billion in deb, he bankupcy sysem is now as lage as Medicae (2010 Repo of Saisics Requied by he Bankupcy Abuse Pevenion and Consume Poecion Ac of 2005, Table 1X). Ye despie is size, economiss sill have a limied undesanding of a household s bankupcy decision. The majoiy of he economic lieaue addessing bankupcy has focused pimaily on he financial facos ha conibue o a household s bankupcy decision, (fo example: Whie, 2007; Fay, Hus and Whie, 2002; Goss and Souleles, 2002; Domowiz and Saain, 1999; Buckley, 1994; Whie, 1987). A smalle lieaue has examined he demogaphic facos (Lefgen and McInye, 2009) and legal facos (Dawsey and Ausubel, 2004; Mille 2010) ha conibue o bankupcy. To dae, howeve no wok has been done o examine whehe social newoks conibue o bankupcy. The pesence of social newoks may be able o explain seveal phenomena obseved in he bankupcy daa. Fis, social newoks, o he lack heeof, may explain why many households who would financially benefi fom bankupcy do no acually file fo bankupcy. Whie (1998) found ha while a leas 15 pecen of households would benefi financially fom bankupcy, only abou one pecen of households acually files each yea. The auho agues ha some households do no file, even hough i is financially beneficial o do so, because cedios do no always aemp o collec. She agues ha ohes choose no o file immediaely because hey gain fom having he opion o file in he fuue. My findings imply ha some households may no file fo bankupcy because hey have weak social newoks. Social newoks may povide infomaion abou he equied papewok, ecommend an aoney, educe he sigma associaed wih bankupcy, o incease awaeness of i benefis. Thus, 1
wihou song social newoks, some households may no file fo bankupcy, even hough i is financially beneficial o do so. In addiion, social newoks may be able o explain he vas egional vaiaion in bankupcy aes. As shown in Lefgen and McInye (2009), bankupcy aes vay dasically acoss locaions. While some of he vaiaion can be explained by legal and demogaphic chaaceisics, much of he vaiaion in bankup aes emains unexplained. My findings sugges ha households in one aea may be moe likely o file because hei social newoks have eihe inceased hei knowledge of he bankupcy sysem, educed he cos of finding an aoney, educed he sigma associaed wih bankupcy, o inceased awaeness of he benefis of bankupcy. Finally, social newoks may be able o explain why bankupcy aes have isen so damaically ove ime. Duing he fis half of he wenieh cenuy, bankupcy was a ae even; on aveage, only 15,000 households filed fo bankupcy each yea. Bu he numbe of households filing fo bankupcy has gown seadily. Indeed, in 2010, ove 1.5 million households filed fo bankupcy. Cuen eseach, howeve has been unable o explain why he bankupcy ae has isen so damaically ove ime. My esuls sugges ha he bankupcy ae may have isen because social newoks have diffused knowledge abou he bankupcy pocess. 2. PERSONAL BANKRUPTCY IN THE UNITED STATES The Unied Saes has wo pimay pocedues fo pesonal bankupcy--- Chape 7 and Chape 13. Debos can choose beween hese wo pocedues. 1 In a Chape 7 case, debos liquidae some of hei asses while eaining ceain exemp popey. Specifically, homesead exempion laws poec a debo s home equiy while pesonal exempion laws poec a debo s pesonal popey (such as vehicles, jewely, and cash). 2 As seen in Table 1, hese exempion levels vay damaically acoss saes. 3 Fo example, in 1995, debos in Akansas, Floida, Iowa, Kansas, Oklahoma, Souh Dakoa, and Texas could keep an unlimied amoun of home equiy while households in Delawae and Mayland could no keep any home equiy. 4 Afe he debo s nonexemp asses ae liquidaed, he poceeds ae used o epay cedios. The debo s emaining unsecued debs can hen be 1 The empiical analysis uses daa fom he 1991-1995 Panel Sudy of Income Dynamics (PSID). Pio o 2005, all households could choose beween a Chape 7 and a Chape 13 bankupcy. In 2005, he Bankupcy Code was amended o include a means es which was inended o peclude households wih high income levels fom filing unde Chape 7. Specifically, he means es equies all households wih income above he sae median o file unde Chape 13 of he Bankupcy Code. I should be noed ha elief unde Chape 11 is also available o individual debos, bu few debos choose ha opion because of is significan cos. 2 Pesonal popey exempion laws ae nooiously difficul o quanify. Like pio woks, I collec infomaion on he pesonal popey exempion levels peaining o auomobiles, cash, nea cash financial asses, and jewely. I also colleced infomaion on wildcad exempions. 3 Whee he law pemis households o choose a fedeal exempion, I use he fedeal exempion if i is highe han he sae exempion. 4 Fo a fuhe discussion of exempion laws and hei impac on a household s bankupcy decision, see Mille (2010). 2
dischaged. 5 eanings. Unde Chape 7 of he Bankupcy Code, he debo may keep all of his fuue As an alenaive o Chape 7, debos may file fo bankupcy unde Chape 13 of he Bankupcy Code. Unde Chape 13, he debo eains all of his asses and insead agees o epay some of his debs using his fuue eanings. Specifically, he debo pays his pojeced monhly disposable income (he diffeence beween his monhly income and monhly budgeed living expenses) ino a Chape 13 epaymen plan. The poceeds of he Chape 13 epaymen plan ae disibued among he debo s cedios. Afe making paymens fo hee o five yeas, he case is closed and any emaining debs ae dischaged. 6 Aside fom he financial benefi, bankupcy has numeous non-pecuniay benefis. Mos noably, when a debo files unde eihe bankupcy chape cedios mus sop all collecion effos; his means ha cedios mus cease all foeclosue poceedings and wage ganishmens. In addiion, cedios geneally canno send he debo coespondence o elephone he debo. Bankupcy, howeve can be a cosly endeavo--- debos mus pay boh a cou filing fee and aoney fees. These fees can be quie high, consideing ha he ypical debo has limied funds and cedi. As an example, filing fees ae se by U.S. saue--- in 1995, debos wee equied o pay a $140 filing fee when hey filed fo bankupcy. Aoney fees, on he ohe hand, vay acoss locaion. When ineviewing aoneys in fou ciies in 1990 and 1991, Bauche (1993) found ha hei fees aveaged $1,025 fo a Chape 13 bankupcy. And hese fees have coninued o ise ove ime--- i is esimaed ha he median aoney fee fo a Chape 13 bankupcy was $2,000 in 2007 (U.S. GAO Repo 2008). 7 In addiion, o he filing fee and aoney fees, hee ae many non-pecuniay coss associaed wih filing fo bankupcy, including a fuue inabiliy o obain cedi and emoional sain. Newoks may affec a household s bankupcy decision in many ways: hey could povide infomaion abou he bankupcy sysem and povide insigh ino he necessay papewok. In addiion, discussing he bankupcy pocess may decease he sigma associaed wih bankupcy. Moeove social newoks could ale households o all he benefis of bankupcy--- boh he moneay gain ha can be associaed wih filing fo bankupcy as well as he non-pecuniay benefis. Finally, by ecommending a lawye social newoks may educe he seach coss associaed wih finding an aoney. 3. BACKGROUND LITERATURE Social newoks impac a wide aay of behavio. Fo example, by defining newoks using he individual s language spoken a home and PUMA, Beand e al. (2000) found ha 5 Mos unsecued debs, including cedi cad debs, insallmen loans, medical debs, unpaid en and uiliy bills, o judgmens, and business debs, can be dischaged unde Chape 7. 6 Some debs which ae no dischageable unde Chape 7 including maial popey selemens, debs fom faud and defalcaion, embezzlemen and laceny, can be dischaged unde Chape 13 of he Bankupcy Code. Thus, he Chape 13 dischage is ofen efeed o as a supe dischage. 7 Fo addiional infomaion on aoney fees and chape choice, see Lefgen e al. (2010). 3
social newoks impac welfae paicipaion. Similaly, by defining newoks using a woman s acial goup and zip code, Aize and Cuie (2004) found ha social newoks impac he use of publically funded penaal cae. Likewise, using language goup and Census Sub-Division o define newoks, Dei (2005) found ha social newoks impac he healh cae uilizaion aes. Howeve o dae, no one has examined he impac of social newoks on a household s bankupcy decision. Pio empiical woks documened a posiive coelaion beween a household s bankupcy decision and is neighbos bankupcy decisions by egessing a household s bankupcy decision on he lagged filing ae in he household s aea. Fo example, using household level daa fom 1984-1995, Fay, Hus, and Whie (2002) found ha households ae moe likely o file fo bankupcy if hey live in a disic ha had a highe filing ae in he pevious yea. Because hei egessions included sae and yea fixed effec, he auhos agued ha hei esuls likely efleced local diffeences in he level of bankupcy sigma o he influence of infomaion cascades. Using an analogous daa se, Han and Li (2004) found ha households ae moe likely o file fo bankupcy if hey live in a sae ha had a highe filing ae in he pevious yea. Because hei egessions included egion and yea fixed effecs, he auhos also agued ha hei esuls likely eflec sigma o newok effecs. Cohen-Cole and Duygan-Bump (2008) also showed ha households ae moe likely o file fo bankupcy if hey live in a neighbohood wih a high bankupcy ae. Thei egessions included he filing ae wihin a mile of he esponden and he filing ae ove a one o fou mile adius of he esponden. Boh facos wee found o have a posiive impac on a household s bankupcy decision. Howeve as will be discussed in he following secion, hese egessions ae plagued wih omied vaiable bias and heefoe canno accuaely esimae he impac of social newoks on a household s bankupcy decision. As an example, he egessions could no disinguish he effec of newoks fom unobseved ime vaying neighbohood chaaceisics such as he numbe of adveisemens fo bankupcy aoneys. Of addiional concen is he boad definiion of neighbohood; Fay, Hus, and Whie (2002) and Han and Li (2004), define neighbohoods a he disic and sae level especively. This pape moe accuaely esimaes he ole of social newoks on a household s bankupcy decision. As descibed in moe deail below, I employ an empiical saegy ha is consisen wih Dei (2005), Aize and Cuie (2004), and Beand, Lume and Mullainahan (2000)--- I use couny and acial vaiaion o idenify newok effecs. Thus, my empiical saegy asks whehe being suounded by ohes of he same acial goup inceases bankupcy use moe fo hose fom acial goups wih high filing aes. The ichness of my daase allows me o conol fo omied vaiables o a geae degee han many ohe non-expeimenal sudies. In paicula I include couny-yea fixed effecs and acial goup fixed effecs. I also conol fo he diec effec of he densiy of he acial goup in he couny. To es fo any emaining omied vaiable bias, as descibed in secion 6.1, I use an insumenal vaiables appoach, I exploe he effec of dopping covaiaes as well as adding household fixed effecs. Finally, unlike pevious bankupcy papes in which neighbohoods wee defined a he disic o sae level, in his pape neighbohoods ae defined a he couny level--- while ealie woks used he 4
lagged filing ae in a household s disic o sae level, I use he lagged filing ae in he household s couny of esidence. 8 4. DATA To esimae he impac of social newoks on a household s bankupcy decision, I use daa fom he 1991-1995 Panel Sudy of Income Dynamics (PSID). In 1996, he PSID asked espondens whehe hey had eve filed fo bankupcy, and if so, in wha yea(s). My daa se is a combined coss-secion, ime-seies sample of PSID households fom 1991-1995. 9 Duing each of hese yeas seleced, he PSID colleced infomaion on households financial and demogaphic chaaceisics. Fo example, each yea he PSID colleced daa on a household s labo income, changes in he household s labo income, family size, age of he household head, educaion of he household head, maial saus of he household head, and he ace of he household head. In addiion, he PSID colleced daa on homeowneship and business owneship. As discussed in he insiuional backgound, a household s financial benefi fom filing a Chape 7 bankupcy equals he amoun of deb dischaged less any nonexemp asses he household mus give up. Theefoe, fo each yea I consuc he financial benefi of a Chape 7 bankupcy in yea, which is given by: Financial Benefi i = Deb i max[asses i - Exempion i, 0] whee Deb i is he value of household i s unsecued deb in yea, Asses i include a household s home equiy, equiy in auomobiles, and financial asses, and Exempion i is he applicable exempion level. 10,11 8 Due o limiaions in he cou s daa collecion, I canno use he lagged filing ae a a smalle geogaphic level. Bankupcy filing aes, fo example, ae no available a he zip code o census ac level. 9 This daase is simila o ha used in Fay, Hus, and Whie (2002). In ode fo a paicula household o be included by my sample, i mus have answeed he PSID quesionnaie in 1996. Households ha ae in he sample fo 1991-1995 ae also included fo any of he addiional yeas fo which daa ae available. I used he confidenial PSID geocodes o assign households o hei counies of esidences in each yea of he sample. Because I use PSID weighs, he sample is epesenaive of he geneal populaion. Finally, I uilize simila demogaphic and financial vaiables as Fay, Hus, and Whie (2002). 10 While he PSID collecs infomaion on home equiy on an annual basis, i only collecs infomaion on unsecued deb and non-housing wealh evey fou yeas. As a esul, like Fay, Hus, and Whie (2002), I used he 1989 daa o consuc unsecued deb and non-housing wealh measues fo each of he yeas 1991-1993 and he 1994 daa o consuc unsecued deb and non-housing wealh measues fo 1994-1995. As a esul, my measue of financial benefi is subjec o measuemen eo. Howeve Fay, Hus, and Whie (2002) noe ha his measuemen eo does no significanly ale he esuls. 11 I colleced infomaion on he exempion levels in place in each yea which peained o equiy in owne-occupied homes, vehicles, cash, nea cash financial asses, and jewely. The exempion levels ae adjused by he appopiae amoun if he household conains a maied couple. When sae laws pemi households o choose fedeal exempions, I use fedeal exempions if hey ae highe han he sae exempions. Unlike Fay, Hus, and Whie (2002), Fay, Hus, and Whie (1998), and Elul and Subamanian (2002), I do no lump ogehe homesead and non-homesead exempions--- by lumping hese exempions ogehe ealie woks assumed ha households ake advanage of he vaious bankupcy exempions by conveing asses fom nonexemp o exemp caegoies whee possible. The Bankupcy Code, howeve specifically pohibis his ype of behavio. Insead, my measue of nonexemp asses equals he household s non-exemp home equiy, plus is non-exemp 5
Finally, in 1996, he PSID asked households if beween 1991 and 1995, a cedio had eve called o come o see you o demand paymen, hei wages had been aached o ganished by a cedio o a lien had been filed agains hei popey because hey could no pay a bill, and if so, in which yea(s). Table 2 shows summay saisics by ace. Like Aize and Cuie (2004), I disinguish hee acial goups: Afican-Ameicans (blacks), non-hispanic whies (whies) and Hispanics. 12 The acial goups exhibi subsanial vaiaion in bankupcy aes; blacks have he highes level of bankupcy use followed by whies and hen Hispanics. Hispanics, howeve would gain he mos, financially fom filing fo bankupcy, followed by blacks and hen whies. Finally, whies have he highes household labo income, followed by Hispanics and hen blacks. In ems of demogaphic vaiables, Hispanic households ae younge while black households ae less likely o be maied. Whie households ae moe likely o own a business o a home. 5. EMPIRICAL STRATEGY As menioned above, pevious woks on pesonal bankupcy used he sae s lagged filing ae as a poxy fo a household s social newok. These woks esimaed egessions such as he following: P( Bankup i, s, ) 1 Bankup s, 1 2X i, 3Zs, 1 4REGION s 5YEAR i, s, ( 1) whee i indexes he household, s indexes he sae, and indexes he yea. Bankup i,s, is a dummy vaiable which equals one if he household filed fo bankupcy in yea, X i, is a veco of household chaaceisics, Z s,-1 is a veco of ime-vaying sae chaaceisics fom he pevious yea REGION s is a veco of egion fixed effecs, YEAR is a veco of yea fixed effecs and Bankup s, 1 is he filing ae in sae s in he pevious yea. 13 In hese egessions, Bankup s, 1seves as a poxy fo he household s social newok. This specificaion, howeve is poblemaic as assumes ha conacs ae andomly disibued wihin a neighbohood. Thus, i suffes fom he eflecion poblem (Manski, 1993) which asks whehe individual behavio depends on he behavio of he goup (social effecs) o whehe individuals in a goup behave similaly because hey ae subjec o he same shocks (coelaed effecs). The eflecion poblem is caused by wo ypes of omied vaiable bias: omied pesonal chaaceisics ha ae coelaed wih Bankup s, 1 and omied sae level chaaceisics ha ae coelaed wih Bankup s, 1. As an example of he fome households living in a pooe aea may be less financially savvy. As an example of he lae neighbohoods wih numeous adveisemens fo bankupcy aoneys may incease an individual s pobabiliy of bankupcy as well as he bankupcy filing ae in he neighbohood. pesonal popey. 12 Like Aize and Cuie (2004) I exclude household heads who ae Asian, Ameican Indian, o of ohe o unknown ace. These households oal less han 3 pecen of my sample. 13 Fay, Hus, and Whie (2002) included sae fixed effecs and he lagged filing ae in he household s disic in he pevious yea. 6
Like, Beand, Lume and Mullainahan (2000), Aize and Cuie (2004), and Dei (2005), o measue he impac of social newoks on a household s bankupcy decision, I measue a household s newok using he numbe of people he household ineacs wih in combinaion wih he aiudes and knowledge of hose people owads bankupcy. Thus newoks ae defined as: NETWORK c, = (Densiy of acial goup in couny c in yea ) c, * (bankupcy knowledge and aiudes of ohes fom acial goup who live in couny c in yea ) c, The fis componen, emed by Beand e al. (2000) as conac availabiliy, measues he quaniy of conacs. I is a poxy fo he numbe of people he household ineacs wih; he moe people of he same acial goup who live in he couny, he lage he available conacs. 14 Simila o pio woks, he measue of conac availabiliy is defined as follows: Cc, / Ac, CA c, ln R / T whee C c, is he numbe of people in couny c who belong o acial goup in yea, A c, is he numbe of people who live in couny c in yea, R is he oal numbe of people in he couny who belong o acial goup in yea, and T is he oal numbe of people in he couny in yea. Dividing by R /T pevens me fom undeweighing smalle acial goups. Howeve as shown in secion 6.3, my esuls ae obus o alenaive measues of conac availabiliy. The second componen is my qualiy measue; he moe people of he same ace who have filed fo bankupcy, he geae he infomaion povided. The above fomula suggess ha I poxy he knowledge and aiudes of ohes fom he same acial goup in couny c wih he filing ae of acial goup in couny c (excluding household i) in yea, which I efe o as Bankup ( i) c,. Howeve Bankup ( i) c, may eflec unobseved chaaceisics ha a household has in common wih ohe households fom he same acial goup living in he same aea. As a esul, using his measue could inoduce omied vaiable bias. Theefoe, like Beand e al. (2000) and Dei (2005), I use Bankup he bankupcy filing ae of he acial goup in he Unied Saes. 15 Thus, my pimay specificaion is given by: Bankup i, c, 1CAc, * Bankup 2CAc, 3X i, 4COUNTYc * YEAR 5RACE i, i, c, ( 2) whee i indexes he household, c indexes he couny, indexes he acial goup, and indexes he 14 Beand, Lume and Mullainahan (2000), Aize and Cuie (2004), and Dei (2005) all define a household s social newok in a simila manne. Fo example, Aize and Cuie (2004) use he numbe of people in one s acial goup in one s zip code as hei measue of conac availabiliy. Beand, Lume and Mullainahan (2000) use he numbe of people in one s Public Use Micodaa Aea who speak one s language as hei measue of conac availabiliy. Similaly, Dei (2005) uses he numbe of people in one s Census Sub-Division who speak one s language as he measue. 15 The U.S. Bankupcy Cou does no collec infomaion on ace. Theefoe, his vaiable is no available on an annual basis. I collec his infomaion fom he 2001 Consume Bankupcy Pojec (Waen, 2004), which esimaes he bankupcy ae by ace. Sudies by he Insiue fo Financial Lieacy (2009, 2010, and 2011 Annual Consume Bankupcy Demogaphics Repo) show ha hese aes do no vay significanly ove ime. As shown in secion 6.2, my esuls ae obus o alenaive quaniy measues. 7
yea. Bankup i,c, is a dummy vaiable which equals one if he household files fo bankupcy in yea. Again, CA c, denoes conac availabiliy and Bankup is he filing ae of acial goup. X i, is a veco of household chaaceisics, COUNTY c *YEAR is a veco of counyyea fixed effecs, and RACE i, is a veco of acial goup fixed effecs. I do no include Bankup in my egessions because i is subsumed by ace fixed effecs. By including COUNTY c *YEAR fixed effecs, I can conol fo unobseved neighbohood chaaceisics. Similaly, by including RACE i, fixed effecs, I can conol fo unobseved acial goup chaaceisics, such as pefeences. Finally, diecly including CA c, conols fo any omied pesonal chaaceisics ha ae coelaed wih CA c,. Two poenial souces of omied vaiable bias emain. The fis poenial souce ae omied pesonal chaaceisics ha ae coelaed wih CA c, * Bankup. Such a coelaion would aise if individually diffeenially self-selec away fom hei acial goup. I invesigae his plausibiliy by insumening CA c, wih he numbe of people fom acial goup in he enie MSA. As seen in secion 6.1, i is unlikely ha my esuls ae diven by his diffeenial selecion. Addiionally, my esuls could be biased by unobsevable household chaaceisics. If unobsevable chaaceisics dive my esuls, hen inceasing he se of unobsevables by eaing obsevable chaaceisics as unobsevable would have a lage impac on he esimae of newok effecs. Addiionally, if unobseved chaaceisics dive my esuls, adding household fixed effecs would have a lage impac on he esimae of newok effecs. In secion 6.1, I also show ha i is also unlikely ha my esuls ae diven by omied household level chaaceisics. 6. ESTIMATION 6.1 The Pobabiliy of Bankupcy Table 3 pesens he main esuls. As deailed in equaion 2, I esimae a linea pobabiliy model fo bankupcy in which he independen vaiables include a measue of conac availabiliy (CA c, ), he ineacion of CA c, wih he bankupcy filing ae of he household s acial goup ( Bankup ), household chaaceisics, acial goup fixed effecs 16, and couny-yea fixed effecs. 17,18 The household chaaceisics include dummy vaiables ha denoe whehe a cedio called o demand paymen, whehe wages wee ganished, o whehe a lien was placed on popey, as well as he head s maial saus. In addiion, as in Fay, Hus, and Whie (2002), I include he financial benefi of bankupcy (FinBen i ) 19, FinBen 2 i, he 16 Households in he PSID ae asked o self idenify hei acial goup. 17 Like Beand e al. (2000), Aize and Cuie (2004), and Dei (2005), I esimae a linea pobabiliy model insead of a logi o pobi model. As explained in Beand e al. (2000), pobis and logis become compuaionally infeasible in he pesence of 9,000 couny-yea fixed effecs. As a specificaion check, I esimae pobi and logi models wihou he fixed effecs and find simila esuls. 18 As in Fay, Hus, and Whie (2002), sandad eos ae coeced using he Hube/Whie pocedue, which allows eo ems fo he same individual o be coelaed ove ime. 19 Fo compuaional ease, Financial Benefi is measued in $10,000. 8
household s labo income, he educion in he household s labo income 20, age, age squaed, yeas of educaion, family size, a dummy vaiable if he household owns a business, and a dummy vaiable if he household owns a home. As seen in he fis column of Table 3, he ineacion em is significan and posiive, showing ha social newoks ae impoan in a household s bankupcy decision. Ohe coefficiens have he expeced signs. Like Fay, Hus, and Whie (2002), I find ha having a highe financial benefi of bankupcy inceases he pobabiliy of filing fo bankupcy. This finding suppos Fay, Hus, and Whie s (2002) hypohesis ha households espond o financial incenives in making hei bankupcy decisions. Addiionally, like Fay, Hus, and Whie (2002), my esuls indicae ha advese evens do no affec he likelihood of bankupcy; he vaiable ha denoes he change in income is no saisically significan. As expeced, esuls show ha highe household labo income deceases he pobabiliy of filing fo bankupcy. Ineesingly, howeve households ae only esponsive o some collecion mehods. Befoe a household files fo bankupcy, a cedio may call o come o see he household o demand paymen, ganish wages, o place liens on popey. 21 Regession esuls show ha wage ganishmen and liens do no have an impac on he household s pobabiliy of bankupcy. Howeve if a cedio calls o comes by o demand paymen, a household is moe likely o file fo bankupcy. To inepe he newok coefficiens, I follow Beand e al. (2000). Conside he model Bankup CA * Bankup CA X COUNTY YEAR RACE i, c, 0 1 c, 2 c, 3 i, 4 c * 5 whee β 0 is a measue of policies ha influence welfae paicipaion. I is scaled such ha a one pecenage poin inceases in β 0 leads o a one pecenage poin incease in bankupcy in he absence of newok effecs. Howeve in equilibium, changes in policy leads o boh a diec effec on bankupcy, β 0, and an indiec effec via newoks. Taking he aveage of boh sides by acial goup and diffeeniaing wih espec o β 0 yeilds: dbankup d Bankup 1 CA * 1 d d 0 0 whee CA is he mean conac availabiliy fo acial goup. Solving his equaion shows ha he exa change induced by newoks is 1/( 1 1CA ) 1. To ge he esponse fo he economy as a whole, like Beand e al. (2000), I ake he weighed means ove all he acial goups. These compuaions show ha fo a policy change ha inceases bankupcy use by one pecenage poin in he absence of newoks, social newoks may aise he esponsiveness by an addiional 23 pecenage poins. Because i is impossible o know he exac each of he newok, as an alenaive specificaion, in he second column, I esimae newok effecs when conac availabiliy is i, i, c, 20 As in Fay, Hus, and Whie (2002), his is calculaed as he educion in a household s income beween yea -2 and -1 if income fell, o else zeo. 21 Recall fom secion 2 ha hese collecion measues mus sop when a household files fo bankupcy. 9
measued as he lage Meopolian Saisical Aea (MSA). 22 hose found in he fis column. The esimaes ae quie simila o My esuls could be biased by omied pesonal chaaceisics ha ae coelaed wih CA c, * Bankup. Such a coelaion would aise if individually diffeenially self-selec away fom hei acial goup. Fo example, living away fom you acial goup may signal success if you ae in a acial goup wih a high bankupcy ae wheeas i may signal bankupcy poneness if you ae in a acial goup wih a low bankupcy ae. Such diffeenial selecion would cause he coefficien on he ineacion em o be posiive alhough no newok effec exiss. In he hid column of Table 3, I use an insumenal vaiables appoach o assess whehe he posiive esuls seen in column one ae caused by households diffeenially self-selecing away fom hei acial goup. To es his possibiliy, I insumen he ineacion em a he couny level wih he ineacion em a he lage MSA level. Theefoe, his insumenal vaiables appoach should educe any bias caused by choice of esidence. OLS and IV esimaes ae simila in magniude; hus hee is lile evidence ha my esuls ae diven compleely by diffeenial selecion. As an addiional obusness check, I examine whehe unobsevable household chaaceisics dive my esuls. If unobsevable chaaceisics dive my esuls, hen inceasing he se of unobsevables by eaing obsevable chaaceisics as unobsevable would have a lage impac on he esimae of newok effecs. In he fouh column of Table 3, I only include conac availabiliy, acial goup fixed effecs, couny-yea fixed effecs, and he ineacion beween CA and bankupcy filing ae of he acial goup. In he fifh column I also include demogaphic chaaceisics: family size, dummy vaiables fo he head s maial saus, he head s age, age squaed, and he head s educaion. In boh specificaions, he coefficien on he ineacion em is posiive, significan, and of a simila magniude o my pimay specificaion. Similaly, o examine whehe unobsevable household chaaceisics dive my esuls, in he sixh column I include family fixed effecs. 23 Wih he inclusion of family fixed effecs, idenificaion is based on changes ove ime. As seen in he sixh column, he magniude of he coefficiens emains simila even when hese fixed effecs ae included. Howeve i should be noed ha due o he decease in sample size, he sandad eos incease. 6.2 Paamee Heeogeneiy The impac of social newoks may vay acoss households. In Table 4, I examine he heeogeneous esponses acoss obsevable goups; all egessions conol fo household chaaceisics as well as acial goup and couny fixed effecs. The magniude of my poin esimae does no diffe based on a sae s laws. In he fis ow of Table 4, I include he ineacion beween my newok vaiable and a dummy vaiable ha 22 The Unied Saes Office of Managemen and Budge (OMB) has defined 366 Meopolian Saisical Aeas. The OMB defines an MSA as one o moe adjacen counies o couny equivalens ha have a leas one uban coe aea of a leas 50,000 pesons plus adjacen eioy ha has a high degee of social and economic inegaion wih he coe as measued by commuing ies. 23 Recall ha my daa se is a combined coss-secion, ime-seies sample of PSID households fom 1991-1995. On aveage, households appea in he sample fo hee yeas. 10
equals one if he sae has a high exempion level. 26 Similaly, in he second ow, I include he ineacion beween my newok vaiable and a dummy vaiable ha equals one of he sae does no allow wage ganishmen. The coefficiens on hese ineacion ems ae insignifican, suggesing ha my esuls ae no diven by hese sae laws. In he nex fou ows, I ineac my newok vaiable wih he household s labo income, financial benefi of bankupcy, asses, and debs. Again, he coefficiens on hese ineacion ems ae insignifican, suggesing ha he impac of social newoks does no vay based on hese obsevable household chaaceisics. 6.3 Specificaion Checks In Table 5, I show ha my esuls ae obus o diffeen measues of conac availabiliy. In he fis ow, I use he level vesion of he cuen log measue of conac availabiliy, Cc, / Ac,. In he second ow, I use he unadjused facion in he aea ha is in one s acial R / T C c Ac, goup,, /. In he hid ow, I use he log of his measue, ln( C c, / Ac, ). All hee measues poduce posiive and significan esuls. My esuls ae also obus o diffeen measues of Bankup, ( i) c,. As noed above, Bankup ( i) c, may eflec unobseved chaaceisics ha a household has in common wih ohe households fom he same acial goup living in he same aea. As a esul, using his measue could inoduce omied vaiable bias. Theefoe, like Beand e al. (2000) and Dei (2005), insead, I use Bankup he mean bankupcy ae of he acial goup in he Unied Saes. In ow 4, as an alenaive poxy, I use Bankup c, 1. This alenaive measue also poduces a posiive and significan esul. 7. CONCLUSION In his pape I use infomaion on couny and ace o show ha social newoks have a posiive impac on a household s bankupcy decision. Households end o ineac wih ohes fom hei acial goup. Hence, households who live in a couny wih numeous households of hei own acial goup will have a lage pool of available conacs. Like Beand e al. (2000), Aize and Cuie (2004), and Dei (2005), I ask whehe inceased conac availabiliy aises he pobabiliy of bankupcy moe fo households fom acial goups wih high bankupcy filing aes. In suppo of newok effecs, I find a posiive and significan coefficien on he ineacion beween conac availabiliy and he bankupcy filing ae of one s own acial goup. Undesanding he impac of social newoks on a household s bankupcy decision has impoan policy implicaions. Fo example, many ecen papes have focused on assessing he 26 To deemine whehe a sae has a high o low exempion level, I add he pesonal and homesead exempion levels ogehe. Fo my analysis, I spli oal asse exempion levels in half. 11
impac of consume cedi egulaions (including exempion levels, ganishmen laws and usuy laws) on a household s bankupcy decision. My findings sugges ha esimaes pu foh in hose pio papes ae oo low--- social newoks will incease hese elasiciies hough muliplie effecs. In a boade conex, his pape shows ha households consul hei social newoks when making financial decisions. I aises he quesion: do households consul hei social newoks when making ohe financial decisions? Fuhe wok should be done o invesigae whehe some households puchased subpime loans because of hei social newoks. Similaly, fuhe wok should be done o invesigae whehe some households avoided foeclosue because hei social newoks showed hem how o ake advanage of he many govenmen assisance pogams. The findings pu foh in his pape suggess ha financial educaion pogams may benefi moe han hose households diecly being helped. 12
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Table 1: Exempion Levels by Sae, 1995 Homesead Exempion Level Pesonal Popey Exempion Level Alabama 5,000* 3,000* Alaska 54,000 4,400* Aizona 100,000 1,150* Akansas unlimied 1,400 e Califonia 75,000 1,900* Coloado 30,000 500* Connecicu 75,0000* 2,500* Delawae 0 500 Disic of Columbia 15,000* 3,425* Floida unlimied 2,000* Geogia 5,000* 1,400* Hawaii 20,000 a 1,000* Idaho 50,000 1,500* Illinois 7,500* 3,200* Indiana 7,500* 4,000* Iowa unlimied 1,300* Kansas unlimied 20,000* Kenucky 5,000* 3,500* Louisiana 7,500* 0 Maine 12,500* 2,900* Mayland 0 5,500* Massachuses 100,000 825* Michigan 15,000* 0 Minnesoa 200,000 2,000* Mississippi 75,000* 10,000* Missoui 8,000 2,250 f Monana 40,000* 1,200* Nebaska 25,000* 0 Nevada 125,000 15,000* Noe : Pesonal exempion levels apply o wildcad, auomobiles, cash, nea cash financial asses and jewely exempions. * Exempion can be doubled if maied a. Exempion is 30,000 if maied b. Exempion is 33,000 if maied c. Exempion is 7,500 if maied d. Exempion is 10,000 if maied e. Exempion is 2,900 if maied f. Exempion is 3,900 if maied g. Exempion is 6,000 if maied 16
Table 1 Coninued: Exempion Levels by Sae, 1995 Homesead Exempion Level Pesonal Popey Exempion Level New Hampshie 30,000* 4,000* New Jesey 15,000* 3,200* New Mexico 30,000* 4,500 New Yok 10,000* 5,500* Noh Caolina 10,000* 1,500* Noh Dakoa 80,000 1,200* Ohio 5,000* 1,800* Oklahoma unlimied 3,000* Oegon 25,000 b 9,200* Pennsylvania 15,000* 3,200* Rhode Island 15,000* 3,200* Souh Caolina 5,000* 2,200* Souh Dakoa unlimied 4,000 g Tennessee 5,000 c 4,000* Texas unlimied 30,000* Uah 8,000 d 1,500* Vemon 75,000* 8,100* Viginia 5,000* 2,000* Washingon 30,000 3,200* Wes Viginia 15,000* 3,200* Wisconsin 40,000 2,200* Wyoming 10,000* 2,000* Noe : Pesonal exempion levels apply o wildcad, auomobiles, cash, nea cash financial asses and jewely exempions. * Exempion can be doubled if maied a. Exempion is 30,000 if maied b. Exempion is 33,000 if maied c. Exempion is 7,500 if maied d. Exempion is 10,000 if maied e. Exempion is 2,900 if maied f. Exempion is 3,900 if maied g. Exempion is 6,000 if maied 17
Table 2: Summay Saisics Whie Black Hispanic Bankup 0.004 0.005 0.000 (0.063) (0.069) (0.000) Financial Benefi -37,232.77-6,901.66-999.99 (91,098.720) (25,909.370) (5708.751) Cedio Called a 0.035 0.046 0.035 (0.185) (0.210) (0.185) Wages Ganished a 0.000 0.000 0.000 (0.021) (0.012) (0.000) Lien on Popey a 0.002 0.001 0.000 (0.042) (0.030) (0.000) Household Labo Income 37,833.520 18,489.970 20,078.630 (41,253.390) (21,831.180) (18950.970) Reducion in Labo income b -3,870.527-2,215.858-3,658.274 (16,291.640) (7,022.220) (9017.738) Age of Head 45.441 42.700 30.816 (15.932) (14.379) (6.062) Yeas of Educaion 13.148 11.792 10.342 (2.777) (2.733) (3.610) Family Size 2.501 2.496 3.056 (1.421) (1.565) (1.278) Single a 0.168 0.360 0.317 (0.374) (0.480) (0.470) Maied a 0.550 0.244 0.526 (0.498) (0.430) (0.504) Divoced a 0.169 0.188 0.038 (0.374) (0.391) (0.192) Sepaaed a 0.023 0.100 0.072 (0.151) (0.299) (0.261) Own Business a 0.167 0.034 0.023 (0.373) (0.181) (0.152) Own home a 0.563 0.269 0.381 (0.496) (0.444) (0.491) Sample Size 15,964 10,117 51 Noe : Sandad deviaions ae epoed in paenheses a Indicaed a dummy vaiable (yes=1). b The educion in income equals he amoun ha household i's income fell, if income fell, o else zeo. 18
Table 3: Regession Resuls (I) (II) (III) (IV) (V) (VI) CA Measue Couny MSA Couny Couny Couny Couny Esimaion Technique OLS OLS IV OLS OLS OLS Conac Availabiliy* 0.591** 0.717** 0.503** 0.621** 0.650** 0.669 Bankupcy Filing Rae of Racial Goup (0.265) (0.291) (0.246) (0.264) (0.269) (0.562) Conac Availabiliy -0.006-0.010** -0.005-0.006* -0.007* -0.012 (0.004) (0.005) (0.003) (0.004) (0.004) (0.009) Financial Benefi 8.762E-05* 9.302E-05* 8.57E-05 3.850E-09 (0.000) (0.000) (0.000) (0.050) Financial Benefi Squaed 4.03E-07 3.57E-07 3.45E-07-2.130E-07 (0.000) (0.000) (0.000) (0.042) Cedio Called 0.022*** 0.017** 0.018*** 0.016 (0.007) (0.007) (0.007) (0.010) Wages Ganished -0.006-0.004-0.004 0.243 (0.026) (0.027) (0.027) (0.034) Lien on Popey 0.053 0.051 0.051 0.076 (0.045) (0.059) (0.059) (0.065) Household Labo Income -5.743E-08***-7.010E-08***-7.054E-08*** -2.130E-08 (0.000) (0.000) (0.000) 0.000 Household Labo Income Squaed 7.080E-14** 9.057E-14** 9.050E-14** 2.160E-14 (0.000) (0.000) (0.000) (0.000) Reducion in Labo Income 0.000 0.000 0.000-8.68E-09 (0.000) (0.000) (0.000) (0.000) Own Business -0.002 0.000 0.000 0.002 (0.002) (0.002) (0.002) (0.003) Own Home -0.001-0.002-0.001 0.003 (0.002) (0.002) (0.002) (0.003) Demogaphic Chaaceisics Yes Yes Yes No Yes Yes Racial Goup Fixed Effecs Yes Yes Yes Yes Yes Yes Couny-Yea Fixed Effecs Yes No No Yes Yes Yes MSA-Yea Fixed Effecs No Yes Yes No No No Household Fixed Effecs No No No No No Yes Sandad eos ae coeced using he Hube/Whie pocedue, which allows eo ems fo he same household o be coelaed ove ime. All egessions use he PSID family weighs. Demogaphic chaaceisics include dummy vaiables fo maial saus, age, age squaed, family size, and educaion. * significan a 10%; ** significan a 5%; *** significan a 1% 19
Table 4: Paamee Heeogeneiy Coefficien on Newok Coefficien on Ineacion Tem (1) High Exempion * Newok 0.633** -0.085 (0.310) (0.192) (2) No Ganishmen * Newok 0.595** -0.150 (0.267) (0.182) (3) Income * Newok 0.549** 0.000 (0.264) (0.000) (4) Financial Benefi * Newok 0.582** -0.011 (0.266) (0.022) (5) Asses * Newok a 0.566** 0.000 (0.264) (0.000) (6) Debs * Newok b 0.568** 0.000 (0.262) (0.000) Sandad eos ae coeced using he Hube/Whie pocedue, which allows eo ems fo he same household o be coelaed ove ime. All egessions use he PSID family weighs. All egessions include he financial and demogaphic vaiables deailed in Table 3. In addiion, all egessions include acial goup and couny-yea fixed effecs. * significan a 10%; ** significan a 5%; *** significan a 1% a. Regession also includes a vaiable which denoes he household's asses. b. Regession also includes a vaiable which denoes he household's debs. 20
Table 5: Sensiiviy of Resuls o Diffeen Measues Coefficien on Ineacion Tem Coefficien on Conac Availabiliy (1) Measue conac availabiliy as (C c, /A c, )(R /T ) -1 0.504** -0.006* (0.238) (0.004) (2) Measue conac availabiliy as C c, /A c, 2.425*** -0.014 (0.930) (0.009) (3) Measue conac availabiliy as ln(c c, /A c, ) 0.574** -0.005 (0.275) (0.004) (4) Measue Bankup (-i)c, as Bankup c,-1 0.002** -0.008 (0.001) (0.005) Sandad eos ae coeced using he Hube/Whie pocedue, which allows eo ems fo he same household o be coelaed ove ime. All egessions use he PSID family weighs. All egessions include he financial and demogaphic vaiables deailed in Table 3. In addiion, all egessions include acial goup and couny-yea fixed effecs. * significan a 10%; ** significan a 5%; *** significan a 1% 21