essays in public finance and industrial organization a dissertation ...

CHAPTER 1. BANKRUPTCY 2
of the deadweight cost of the bankruptcy process, households and creditors have an
incentive to negotiate payments without a formal bankruptcy filing.
Bankruptcy, as a result, provides households with a form of high-deductible health
insurance. Households are exposed to the financial risk from medical shocks up to
the level of assets that can be seized in bankruptcy and insured against financial risk
above this level.
Summary data on the uninsured suggest that this mechanism could be important.
Figure 1.1 shows that uninsured households have vastly fewer seizable assets than
households with private insurance. Sixty-three percent of the uninsured would give up
less than $5,000 in a bankruptcy filing, compared to only 28 percent of the privately
insured. Figure 1.2 shows that payments by the uninsured are substantially lower
when receiving a high volume of medical care. While payments by the privately
insured scale up proportionally with medical charges, payments by the uninsured are
capped on average at just over $5,000.
To more rigorously examine the mechanism, I construct a simple model of bankruptcy,
medical billing, and insurance choice. The model predicts that, conditional on wealth,
out-of-pocket medical payments should be decreasing in the level of seizable assets for
a given volume of medical care received. Holding wealth constant, households with
fewer seizable assets should be less likely to purchase conventional coverage.
I test these predictions using variation in the state-level asset exemption laws that
specify the type and level of assets that can be seized in bankruptcy and detailed
asset data from the restricted access Medical Expenditure Panel Survey (MEPS) and
the Panel Survey of Income Dynamics (PSID). The degree of cross-state variation
in the asset exemption laws in substantial. Kansas, for example, allows households
to exempt an unlimited amount of home equity and up to $40,000 in vehicle equity.
Neighboring Nebraska allows households to keep no more than $12,500 in home equity
or a $5,000 wildcard of any type of asset. Both states allow households to keep
retirement assets. I construct a simulated instrument that isolates the variation in
seizable assets solely due to these laws, mechanically purging variation due to wealth
from filing under Chapter 7 in most circumstances. The households most affected by the reform are
unlikely to be marginal to the mechanism I analyze.