Social Networks and Personal Bankruptcy

E-ISSN： 1740-1461|12|2|289-310

ISSN： 1740-1453

Source： JOURNAL OF EMPIRICAL LEGAL STUDIES, Vol.12, Iss.2, 2015-06, pp. : 289-310

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Abstract

This article examines the role of social networks in a household's bankruptcy decision. Social networks may affect a household's bankruptcy decision in many ways: they could provide information about the required paperwork, recommend an attorney, reduce the stigma associated with bankruptcy, or increase awareness of its benefits. Using data from the Panel Study of Income Dynamics (PSID), I exploit county and racial variation to identify network effects. My empirical strategy asks whether being surrounded by others of the same race increases bankruptcy use more for those in racial groups with high filing rates. This methodology allows me to include both county‐year and racial‐group fixed effects in my regressions. The results strongly confirm the importance of networks in a household's bankruptcy decision.