Intergenerational Bankruptcy Risks: Learning from Parents’ Mistakes

Abstract

This study investigates inter-generational transmissions of parental bankruptcy shock on children's financial behavior in adulthood. Our results show that younger children who were 9 years or below when their parents declared bankruptcy were 2-3 percentage points less likely to declare bankruptcy than their older siblings who were 10 years and older when the parents’ bankruptcy event occurred. We rule out alternative hypotheses, including birth order, cohort effects, and truncated sample bias. We find corroborative evidence for the “parent socialization” channel, where bankrupt parents, through interactions with children during childhood years, influence their financial behavior and reduce the risks of their children repeating the same mistakes in adulthood.