In the light of increasing household debt, several European countries amended regulation for consumer debt release. These regulations affect consumer behavior, in particular with respect to labor supply, causing in an extreme case a heavily indebted consumer to discontinue efforts. Yet effects on the effort choice may be observed even prior to distress. Eva-Maria Steiger analyzes the influence of the bankruptcy regulation on a consumer's effort choice. She classifies the mechanisms triggered by both U.S. and European bankruptcy regulations and tests them within a hidden action model. Identifying an influence on consumer choice prior to distress and post filing, she appraises the capacity to implement the efficient choice at both dates. Even though the institution of debt release provides adequate bankruptcy regulation ex-post, many regulations are likely to distort the debtor's choices. According to the analysis, the author's proposed regulation enhances incentives and minimizes distortions at both dates.
