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Unsecured Debt, Consumer Bankruptcy, and Small Business

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Author Info
Césaire A. Meh
Yaz Terajima

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Abstract

In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions. In particular, excessive bankruptcy exemptions can be counter-productive. Finally, we argue that entrepreneurial activity is important when studying different bankruptcy rules or regulations.

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File URL: http://www.bankofcanada.ca/en/res/wp/2008/wp08-5.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 08-5.

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Length: 32 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-5

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Related research
Keywords: Economic models; Financial stability; Financial system regulation and policies;

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. Kartik Athreya, 2001. "The growth of unsecured credit : are we better off?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 11-33. [Downloadable!]
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    Other versions:
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  7. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
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    Other versions:
  9. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc. [Downloadable!] (restricted)
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  15. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October. [Downloadable!] (restricted)
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  16. William M. Gentry & R. Glenn Hubbard, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May. [Downloadable!] (restricted)
  17. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law & Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
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    Other versions:
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