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The Effect of Transfer Programs on Personal Bankruptcy

Jonathan D. Fisher


Personal bankruptcy, Unemployment Insurance (UI), and Aid to Families with Dependent Children (AFDC) provide income- and wealth insurance. Since they have similar purposes, it should not be surprising that some households may use more than one of these programs in a year or that the programs are substitutes. This paper adds to the personal bankruptcy literature by examining this interaction between personal bankruptcy and transfer programs. First, the paper develops a new theoretical model of the decision to file for bankruptcy that shows the interaction between bankruptcy and the transfer programs. In this model, an increase in the transfer benefits decreases the probability the household files for bankruptcy. Next, the paper uses two different data sets to determine whether there is evidence of this interaction. Results suggest that decreases in either the average weekly UI benefits or average monthly AFDC benefits increase the number of bankruptcy filings.