The Effect of Personal Bankruptcy Policies on Household Consumption: Evidence from CFPS Data

Using data from the China Family Panel Studies (CFPS) between 2016 and 2022, this paper empirically investigates the influence of personal bankruptcy policies on household consumption in China. By leveraging the introduction of pilot bankruptcy programs as a quasi-natural experiment and applying a difference-in-differences (DID) approach, the results show that the implementation of personal bankruptcy systems significantly increases household spending. The results remain robust after accounting for potential biases and conducting various robustness tests. Further analysis reveals that the primary mechanism is through reducing residents’ precautionary savings motives. Specifically, the system enhances households’ risk appetite and diminishes the tendency to save as a buffer against income and health uncertainties, thereby encouraging higher consumption levels. Heterogeneity analysis shows that the positive effect is stronger among individuals with higher education, larger families, and residents in regions with greater market integration or more developed service sectors. Additionally, the policy promotes consumption related to household development and reduces the Engel coefficient, indicating improved living standards. Importantly, the policy has not led to significant household over-indebtedness. Overall, this paper contributes to understanding the economic benefits of personal bankruptcy policies and offers policy insights to boost household consumption and stimulate domestic demand.