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Credit, Wages and Bankruptcy Laws

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  • Biais, Bruno
  • Mariotti, Thomas

Abstract

We study the impact of different bankruptcy laws in general equilibrium, taking into account the interactions between the credit and labour markets, as well as wealth heterogeneity. Soft bankruptcy laws often preclude liquidation, to avoid ex-post inefficiencies. This worsens credit rationing, depresses investment and reduces aggregate leverage. Yet, tough laws do not necessarily maximize social welfare or emerge from the legislative process. Relatively rich agents can invest irrespective of the law. They favour soft laws that exclude poorer entrepreneurs from the market and thus reduce labour demand and wages. This raises the pledgeable income of the entrepreneurs who still can raise funds, and thus lowers their liquidation rates and the associated inefficiencies. Hence, a soft law can maximize social welfare.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3996.

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Date of creation: Aug 2003
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Handle: RePEc:cpr:ceprdp:3996

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Keywords: bankruptcy law; credit rationing; financial constraints;

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Cited by:
  1. repec:dgr:uvatin:2013034 is not listed on IDEAS
  2. Nicola Gennaioli & Stefano Rossi, 2012. "Contractual Resolutions of Financial Distress," Working Papers 651, Barcelona Graduate School of Economics.
  3. Ondøej Knot & Ondøej Vychodil, 2005. "What Drives the Optimal Bankruptcy Law Design? (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 110-123, March.
  4. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
  5. Andreas Madestam, 2008. "Informal Finance: A Theory of Moneylenders," Working Papers 347, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Besley, Timothy J. & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
  7. Dilip Mookherjee & Sujata Visaria & Ulf Lilienfeld Toal, 2010. "The Distributive Impact of Reforms in Credit Enforcement: Evidence from Indian Debt Recovery Tribunals," Working Papers id:2613, eSocialSciences.
  8. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
  9. Francesco Caselli & Nicola Gennaioli, 2007. "Economics and Politics of Alternative Institutional Reforms," CEP Discussion Papers dp0775, Centre for Economic Performance, LSE.
  10. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
  11. Hajime Tomura, 2007. "Firms Dynamics, Bankruptcy Laws and Total Factor Productivity," Working Papers 07-17, Bank of Canada.

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