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Unsecured Debt, Consumer Bankruptcy, and Small Business

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Author Info

  • Césaire A. Meh
  • Yaz Terajima

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/wp-content/uploads/2010/02/wp08-5.pdf
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Bibliographic Info

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

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References

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  1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
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  7. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  8. Igor Livshits & James MacGee & Michele Tertilt, 2006. "Accounting for the Rise in Consumer Bankruptcies," Discussion Papers 06-001, Stanford Institute for Economic Policy Research.
  9. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
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  14. John Armour & Douglas Cumming, 2005. "Bankruptcy Law and Entrepreneurship," ESRC Centre for Business Research - Working Papers wp300, ESRC Centre for Business Research.
  15. Kartik Athreya, 2001. "The growth of unsecured credit : are we better off?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 11-33.
  16. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  17. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  18. Li, Wenli & Sarte, Pierre-Daniel, 2006. "U.S. consumer bankruptcy choice: The importance of general equilibrium effects," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 613-631, April.
  19. Kartik Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
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Citations

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Cited by:
  1. Andrew Glover, 2010. "Bankruptcy, Incorporation, and the Nature of Entrepreneurial Risk," 2010 Meeting Papers 1010, Society for Economic Dynamics.
  2. Fossen, Frank M., 2011. "Personal bankcuptcy law, wealth and entrepreneurship - Theory and evidence from the introduction of a 'fresh start'," Discussion Papers 2011/8, Free University Berlin, School of Business & Economics.
  3. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2012. "Why do spanish firms rarely use the bankruptcy system? The role of the mortgage institution," Banco de Espa�a Working Papers 1234, Banco de Espa�a.
  4. Jacob M. Short & Andy Glover, 2011. "Bankruptcy, Incorporation and the Nature of Entrepreneurial Risk," 2011 Meeting Papers 836, Society for Economic Dynamics.
  5. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2013. "Are there alternatives to bankruptcy? a study of small business distress in Spain," Banco de Espa�a Working Papers 1315, Banco de Espa�a.
  6. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.

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