The Effect of Bankruptcy Laws on the Valuation of Risky Consumer Debt.

In a market setting with perfect information, a consumer recognizes that he can influence the state-contingent returns, and hence the price, of his risky debt by the decision variables that determine the collateral and promised payments. This paper examines the effect of bankruptcy laws on the feasible consumption opportunities of borrowers and lenders in order to determine the necessary requirements for the bilateral debt market to be perfectly competitive. Copyright 1989 by MIT Press.