Household bankruptcy is thus an American-style put option, which is not necessarily exercised even if the option is "in the money." Based on the value functions in the household's dynamic programming problem, we formulate the value of the bankruptcy option as well as the exercise price. We estimate a life-cycle model in which households choose the optimal time to exercise their bankruptcy option.
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Working Paper
Personal Bankruptcy as a Real Option
November 2019
WP 19-46 - We provide a novel explanation to the longstanding puzzle of the "missing bankruptcy filings." Even though a household with a negative net worth will receive contemporaneous benefit from bankruptcy, there may be greater insurance value from delaying the filing.
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