moral hazzard

Roger Odisio rodisio at igc.org
Tue Nov 23 16:44:30 PST 1999


DANIEL.DAVIES wrote:


> Jordan is quite right to regard the interaction between the card companies
> and the bankruptcy laws as strange. What this is about is basically
> strip-mining the social commons -- the social common in this case being the
> general feeling that people should pay their debts. By far the rational
> thing to do under US bankruptcy laws would be for more people to declare
> bankruptcy -- card business can only be profitable if large numbers of
> people act in a way which is inimical to their own interests. However in
> the US, it looks like this social institution is breaking down -- in the
> USA, the correlation between the bankruptcy rate and the unemployment rate
> has completely broken down at the county level, suggesting that the
> determinant of bankruptcy these days is willingness to pay rather than
> ability.

You have data on US bankruptcy rates "at the county level"? Is that by county where filed? Are there any data that allow you to tell how much credit card spending and defaulting there is by consumers (end users) compared to business? Defaulting by business would not seem to be in the interest of capital in the same way it can be for individuals.

When you say the correlation has "broken down", what does that mean? How many years data do you have to establish the correlation and how good is it? There wouldn't seem to be much of a direct relationship between poor folks in the reserve army and bankruptcies. In this context, unemployment rates are not a very good proxy for either disposable income or wealth are they, particularly as the disparity of income and wealth between rich and poor grows by leaps and bounds?

RO



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