Unsecured Debt, Consumer Bankruptcy, and Small Business
AbstractIn 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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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 08-5.
Length: 32 pages
Date of creation: 2008
Date of revision:
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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 - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-23 (All new papers)
- NEP-ENT-2008-02-23 (Entrepreneurship)
- NEP-MAC-2008-02-23 (Macroeconomics)
- NEP-REG-2008-02-23 (Regulation)
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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