Redistributive Taxation and Personal Bankruptcy in U.S. States

Personal bankruptcy regulation and redistributive taxes and transfers vary considerably across U.S. states and over time. Our hypothesis is that both policies are imperfect substitutes in insuring consumption of risk?averse agents in incomplete markets. Exploiting data variation over time for 18 U.S. states for the period 1980-2003, we find considerable support for this hypothesis: redistributive taxation and bankruptcy exemptions are negatively correlated, and both policies are associated with more equal consumption growth.