revised version published in: Journal of Law and Economics, 2009, 52 (3), 445-467
Both personal bankruptcy and redistributive taxes can insure households' consumption risk
and both vary considerably across US states. We derive sufficient conditions under which
more redistributive taxation makes bankruptcy exemptions less attractive both for the intratemporal
insurance and for inter-temporal consumption smoothing. Exploiting data variation
over time for 18 US states 1980-2003, we find considerable support for our model's
predictions: (i) redistributive taxation and bankruptcy exemptions are negatively correlated;
(ii) both policies are associated with more equal consumption growth whereas the effect on
unsecured household debt is less clear-cut.
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