Bankruptcy Spillovers between Close Neighbors

We examine bankruptcy spillovers between very close neighbors. Our fine grained location data allows us to use the cross-sectional difference methodology (e.g. Grinblatt, Keloharju, Ikaheimo (2008), Campbell, Giglio, Pathak (2011)) to control for non-random neighborhood sorting and unobservable neighborhood shocks. This approach subtracts characteristics of inner-ring neighbors (14 households on average) from outer-ring neighbors (207 households and 0.2 square kilometers on average) to control for neighborhood level unobservables affecting both rings. We show that inner-ring neighborhood bankruptcies, controlling for outer-ring neighborhood bankruptcies, impacts the individual’s choice of whether or not to default, as well as of the legal mechanism of default.