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Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"

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  • Frank M. Fossen

Abstract

A personal bankruptcy law that allows for a "fresh start" after bankruptcy reduces the individual risk involved in entrepreneurial activity. On the other hand, as risk shifts to creditors who recover less of their credit after a debtor's bankruptcy, lenders may charge higher interest rates or ration credit supply, which can hamper entrepreneurship. Both aspects of a more forgiving personal bankruptcy law are less relevant for wealthy potential entrepreneurs who still risk losing their wealth, but tend not to face higher interest rates because they provide collateral. This paper illustrates these effects in a model and tests the hypotheses derived by exploiting the introduction of a "fresh start" policy in Germany in 1999 as a natural experiment, based on representative household panel data. The results indicate that the insurance effect of a more forgiving personal bankruptcy law exceeds the interest effect and on balance encourages less wealthy individuals to enter into entrepreneurship.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.367299.de/dp1100.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1100.

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Length: 41 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diwwpp:dp1100

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Keywords: Personal bankruptcy law; insolvency; entrepreneurship; fresh start;

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References

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  1. 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.
  2. John Armour & Douglas Cumming, 2008. "Bankruptcy Law and Entrepreneurship," American Law and Economics Review, Oxford University Press, vol. 10(2), pages 303-350.
  3. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
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  7. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
  8. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Lawrence Mielnicki, 2005. "Impact of State Exemption Laws on Small Business Bankruptcy Decision," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 620-635, January.
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  12. Dohmen, Thomas J & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert Georg, 2006. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," CEPR Discussion Papers 5517, C.E.P.R. Discussion Papers.
  13. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
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  16. Frank M. Fossen, 2009. "Would a Flat-Rate Tax Stimulate Entrepreneurship in Germany? A Behavioural Microsimulation Analysis Allowing for Risk," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 179-218, 06.
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Cited by:
  1. Michael Fritsch & Alexander Kritikos & Alina Sorgner, 2013. "Drivers of Self-Employment - A Multivariate Decomposition Analysis for the Case of Germany," Jena Economic Research Papers 2013-006, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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