Implications of Means-testing in Chapter 7 Bankruptcy (revision Forthcoming in Econometrica)

The authors study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. The authors prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on its loans. They show that their model accounts for the main statistics regarding bankruptcy and unsecured credit while matching key macroeconomic aggregates and the earnings and wealth distributions. They use this model to address the implications of a recent policy change that introduces a form of " means-testing " for households contemplating a Chapter 7 bankruptcy filing. They find that this policy change yields large welfare gains. EFFECTS OF TRADE LIBERALIZATION ON WELFARE, TRADE, AND EXPORTS The authors study a variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. They calibrate the model to match the employment size distribution of U.S. manufacturing establishments. Export participation in the calibrated model is then compared to the data on U.S. manufacturing exporters. With fixed costs of starting to export about 3.9 times as large as the costs of continuing as an exporter, the model can match both the size distribution of exporters and transition into and out of exporting. The calibrated model is then used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizable gains to moving to free trade. Contrary to the view that the gains to lowering tariffs are larger in models with export decisions, they find that steady state consumption increases by less in their benchmark model of exporting than in a similar model without fixed costs. However, they also find that comparisons of steady state consumption understate the welfare gains to trade reform in models with fixed costs and overstate the welfare gains in models without fixed costs. With fixed costs, tariffs lead to an over-accumulation of product varieties that can be used more effectively along the transition to the