Moral Hazard versus Liquidity in Household Bankruptcy (January, 2023)

Journal of Finance, forthcoming
Winner of the Marshall Blume Prize in Financial Research (2022)
(previously titled The Impact of Debt Relief Generosity and Liquid Wealth on Household Bankruptcy)

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.

title={Moral Hazard versus Liquidity in Household Bankruptcy},
author={Indarte, Sasha},
journal={Journal of Finance},

Financial Crises and the Transmission of Monetary Policy to Consumer Credit Markets (March, 2023)

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.

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

Working Papers

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

(joint with Gideon Bornstein)

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.

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

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

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


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.

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

Bad News Bankers: Underwriter Reputation and Contagion in Pre-1914 Sovereign Debt Markets (August, 2021)

This paper uses new bond-level data on sovereign borrowing and defaults during 1869-1914 to quantify a channel of contagion via banks’ reputation for monitoring borrowers. Concerns over reputation incentivized Britain’s merchant banks (who underwrote sovereign bonds) to monitor and exert influence over sovereigns. Default signaled to investors that a bank was less willing or able to write and support quality issues, indicating that its other bonds may underperform in the future. Consistent with reputation-based contagion, I find that comovement between defaulting and non-defaulting bonds is six times larger when the bonds share an underwriter. To isolate the causal effect of a shared underwriter, I exploit within-country variation in bonds’ underwriters. Testing predictions from a dynamic game where underwriters build a reputation for monitoring, I find further evidence supporting reputation as the mechanism – as opposed to alternative explanations such as wealth effects. These findings highlight that the reputation of intermediaries that monitor and intervene in crises can be a powerful source of contagion unrelated to a borrower’s fundamentals.

title={Bad News Bankers: Underwriter Reputation and Contagion in Pre-1914 Sovereign Debt Markets},
author={Indarte, Sasha},
journal={Working paper},

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.

title={The Costs and Benefits of Household Debt Relief},
author={Indarte, Sasha},
journal={Working paper},

Selected Work in Progress

Inflation Expectations and Household Consumption-Savings Decisions: Evidence from Linked Survey-Transactions Data

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

The Origins of Serial Sovereign Default

(joint with Chenzi Xu)
Awarded NSF Grant

Financial Constraints and the Housing Ladder

(joint with David Berger and Konstantin Milbradt)