Personal Bankruptcy and the Level of Entrepreneurial Activity

Abstract

The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of non-corporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore the probability of owning a business increases as the exemption level rises. We test this prediction and find that the probability of households owning businesses is 35% higher if they live in states with unlimited rather than low exemptions. We also find that the probability of starting a business and the probability of owning a corporate rather than non-corporate business are higher for households that live in high exemption states.

The Political Economy of Entrepreneurship: An Introduction

“…How does the rate of compensation to the lender in case of bankruptcy affect the level of entrepreneurial activity? This is the empirical question raised in the article by Fan and White [12]. Theoretically, a higher exemption rate implies a lower risk for the nascent entrepreneur, which should spur the formation of small businesses.…”

Competencies and Institutions Fostering High-growth Firms

“…To a great extent enterprises are still modeled as "representative firms" which are 3 See, e.g., Delmar (1997), Davidsson (2006) and Reynolds (2007) for recent surveys and discussions. 4 There is a larger literature on the institutional effects on firm entry and firm exit; see, e.g., Djankov et al (2002), Fan and White (2003) and Brandt (2004). 5 We do not count studies with general conclusions such as "since HGFs are important, growth obstacles need to be removed."…”

Bankruptcy and the Market for Mortgage and Home Improvement Loans

“…For f simplicity, we assume that mortgage lenders do not have the right to collect deficiency judgments from debtors, so that they lose whatever portion of the mortgage is not covered by the proceeds of foreclosure. 9 When the consumer both defaults on the mortgage and files for bankruptcy, the mortgage lender is assumed to incur additional transactions costs of D. We expect that D is positive, since foreclosure in the context of bankruptcy requires approval of the bankruptcy trustee and is therefore likely to be delayed. However, D could alternatively be zero, if bankruptcy has no effect on the speed or uncertainty of foreclosure.…”