Publications

Moral Hazard versus Liquidity in Household Bankruptcy

Journal of Finance, 2023 (lead article)
Winner of the Distinguished Paper Brattle Prize (2024)
Winner of the Marshall Blume Prize in Financial Research (2022)
(previously titled The Impact of Debt Relief Generosity and Liquid Wealth on Household Bankruptcy)

Publisher's versionWorking paper version (with internet appendix)

This paper studies the role of moral hazard and liquidity in driving household bankruptcy. First, I estimate that increases in potential debt forgiveness have a positive, but small, effect on filing using a regression kink design. Second, exploiting quasi-experimental variation in mortgage payment reductions, I estimate that filing is five times more responsive to cash-on-hand than relief generosity. Using a sufficient statistic, I show the estimates imply large consumption-smoothing benefits of bankruptcy for the marginal filer. Finally, I conclude 83% of the filing response to dischargeable debt comes from liquidity effects rather than a moral hazard response to financial incentives.

@article{indarte2023moral,
title={Moral Hazard versus Liquidity in Household Bankruptcy},
author={Indarte, Sasha},
journal={Journal of Finance},
year={2023}
}

Financial Crises and the Transmission of Monetary Policy to Consumer Credit Markets

Review of Financial Studies, 2023

Publisher's versionWorking paper version (with internet appendix)Replication kit

How does creditor health impact the pass-through of monetary policy to households? Using data on the universe of US credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses, and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.

@article{indarte2023financial,
title={Financial Crises and the Transmission of Monetary Policy to Consumer Credit Markets},
author={Indarte, Sasha},
journal={Review of Financial Studies},
year={2023}
}


Working Papers

The Impact of Social Insurance on Household Debt (August, 2023)

(joint with Gideon Bornstein)
R&R at the Review of Economic Studies

This paper investigates how the expansion of social insurance affects households’ accumulation of debt. Insurance can reduce reliance on debt by lessening the financial impact of adverse events like illness and job loss. But it can also weaken the motive to selfinsure through savings, and households’ improved financial resilience can increase access to credit. Using data on 10 million borrowers and a quasi-experimental research design, we estimate the causal effect of expanded insurance on household debt, exploiting ZIP code-level heterogeneity in exposure to the staggered expansions of one of the largest US social insurance programs: Medicaid. We find that a one percentage point increase in a ZIP code’s Medicaid-eligible population increases credit card borrowing by 0.82%. Decomposing this effect in a model of household borrowing, we show that increased credit supply in response to households’ improved financial resilience fully accounts for this rise in borrowing and contributed 33% of the net welfare gains of expanding Medicaid.

@article{bornstein2023impact,
title={The Impact of Social Insurance on Household Debt},
author={Bornstein, Gideon and Indarte, Sasha},
journal={Working paper},
year={2023}
}

Bad News Bankers: Evidence from Pre-1914 Sovereign Debt Markets on Monitor Reputation and Contagion (July, 2024)

R&R at the Journal of Finance

Financial institutions facilitate access to financing not only by providing funding, but also by acting as monitors of securities issuers. When an issuer's default damages the reputation of its monitor, contagion may spread to other securities sharing the same monitor. This paper empirically documents that shared monitors can be an important source of contagion. Exploiting features of early sovereign bond markets (where underwriters acted as monitors of sovereigns) and new bond-level data on defaults and prices, I find significant contagion: there is an additional 45\% pass-through of a defaulting bond's price decline to non-defaulting bonds when sharing an underwriter.

@article{indarte2024bad,
title={Bad News Bankers: Evidence from Pre-1914 Sovereign Debt Markets on Monitor Reputation and Contagion},
author={Indarte, Sasha},
journal={Working paper},
year={2024}
}

Explaining Racial Disparities in Personal Bankruptcy Outcomes (July, 2023)

(joint with Bronson Argyle, Ben Iverson, and Christopher Palmer)

SlidesRace Imputation Model (download)Model README

We document substantial racial disparities in consumer bankruptcy outcomes and investigate the role of racial bias in contributing to these disparities. Using data on the near universe of US bankruptcy cases and deep-learning imputed measures of race, we show that Black filers are 21 and 3 percentage points (pp) more likely to have their bankruptcy cases dismissed without any debt relief in Chapters 13 and 7, respectively. We uncover strong evidence of racial homophily in Chapter 13: Black filers are 10 pp more likely to be dismissed when randomly assigned to a White bankruptcy trustee. To interpret our findings, we develop a general decision model and new identification results relating homophily to bias. Using this framework and our homophily estimate, we conclude that at least 40% of the 21 pp dismissal gap is due to either taste-based or inaccurate statistical racial discrimination.

@article{argyle2023explaining,
title={Explaining Racial Disparities in Personal Bankruptcy Outcomes},
author={Argyle, Bronson and Indarte, Sasha and Iverson, Benjamin and Palmer, Christopher},
journal={Working paper},
year={2023}
}

What Explains the Consumption Decisions of Low-Income Households? (November, 2024)

(joint with Ray Kluender, Ulrike Malmendier, and Michael Stepner)

We empirically show that the consumption choices of low-income households are significantly distorted both downwards and upwards by frictions. We measure the impact of frictions as the wedge between actual consumption and a counterfactual "frictionless" consumption. Our approach exploits the fact that consumption, income, wealth, and expectations over income, inflation, and interest rates are sufficient statistics for these wedges in a broad class of models. To implement this approach, we use a new survey of economic beliefs, which we link to administrative consumer transactions data for disproportionately low-income US consumers. In absolute value, the median wedge is 40% of frictionless consumption. 51% of consumers have negative wedges (under-consumers) and 49% have positive wedges (overconsumers). Because financial constraints only generate negative wedges, additional or alternative frictions (such as present bias or consumption commitments) are necessary to rationalize our results.

@article{indarte2024explains,
title={What Explains the Consumption Decisions of Low-Income Households?},
author={Indarte, Sasha and Kluender, Raymond and Malmendier, Ulrike and Stepner, Michael},
journal={Working paper},
year={2024}
}


Invited Publications

Debt Relief for Households in Developing Economies

Oxford Review of Economic Policy, 2024 (joint with Martin Kanz)

Working paper versionInternet appendix

Households in developing economies have greater access to formal credit today than at any point in history, owing to the global expansion of microfinance and recent innovations in consumer finance such as digital lending. While this has improved the ability to smooth consumption and invest in productive activities, it has also raised concerns about overindebtedness. Against this background, this paper reviews and extends the literature on debt relief for households in developing countries. We begin by laying out a simple stylized model that illustrates the costs and benefits of debt relief and use the model to guide our review of the evidence on various relief policies, such as debt forbearance, debt forgiveness, and personal bankruptcy. We additionally present survey evidence from a population of microfinance and bank borrowers with recent exposure to debt relief. The results highlight that an important downside of discretionary debt relief policies, which are common in developing countries, is their potential to affect borrower expectations and create moral hazard. The development of legal bankruptcy institutions that offer a rules-based avenue to discharge unsustainable debts is a promising path to alleviate the credit market inefficiencies that have often accompanied debt relief initiatives in developing economies.

@article{indarte2024debt,
title={Debt Relief for Households in Developing Economies},
author={Indarte, Sasha and Kanz, Martin},
journal={Oxford Review of Economic Policy},
volume={40},
number={1},
pages={139--159},
year={2024},
publisher={Oxford University Press UK}
}

The Costs and Benefits of Household Debt Relief (April 2022)

Prepared for the INET Private Debt Initiative Conference on Debt Restructuring

This paper reviews and extends the literature on the costs and benefits of household debt relief. Debt relief transfers resources from creditors or taxpayers to debtors. This transfer can increase social welfare when households face incomplete markets. A lack of insurance against adverse events, such as job loss and illness, can be offset by the option to reduce debt payments. However, when debt relief imposes larger losses on creditors, possibly through borrower moral hazard, generous debt relief can reduce the supply of credit. Taxpayerfunded debt relief may also spur creditor moral hazard and inefficiently high lending if creditors do not fully internalize the cost of risky lending. Evidence for bankruptcy suggests that the insurance benefits outweigh the credit access costs. Through data and theory, I highlight parallels across different forms of debt relief that may guide future evaluations of optimal debt relief design.

@article{indarte2022costs,
title={The Costs and Benefits of Household Debt Relief},
author={Indarte, Sasha},
journal={Working paper},
year={2022}
}


Selected Work in Progress

Housing Heterogeneity and the Business Cycle: The Role of Micro and Macro Rigidities

(joint with Gideon Bornstein and Emily Williams)

The Origins of Serial Sovereign Default

(joint with SeSe Nguyen and Chenzi Xu)
Awarded NSF Grant


Other Presentations

What Limits Take Up of Household Debt Relief?

Keynote presentation at the Swedish House of Finance's Household Debt Relief, New data, Micro-Macro Perspectives Conference, 2024