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Credit, Wages and Bankruptcy Laws

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  • Biais, Bruno
  • Mariotti, Thomas

Abstract

We analyze how bankruptcy laws affect the general equilibrium interactions between credit and wages. Soft laws reduce the frequency of liquidations and thus ex post inefficiencies, but they worsen credit rationing ex ante. This hinders firm creation and thus depresses labor demand. Rich agents who need few outside funds can invest even if creditor rights are weak. Hence, they favor soft laws that exclude poorer agents from the credit market and reduce the competition for labor. Such laws can generate greater utilitarian welfare than under perfect contract enforcement: By barring access to credit to some agents, soft laws lower wages, which increases the pledgeable income of richer agents and decreases the liquidation rates they must commit to. When they induce strong credit rationing, however, soft laws are Pareto-dominated by tougher laws combined with subsidies to entrepreneurs. (JEL: D82, G33, K22) (c) 2009 by the European Economic Association.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 289.

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Date of creation: Jan 2008
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Publication status: Published in Journal of the European Economic Association, vol.�7, n°5, septembre 2009, p.�939-973.
Handle: RePEc:ide:wpaper:1568

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Cited by:
  1. Hajime Tomura, 2007. "Firms Dynamics, Bankruptcy Laws and Total Factor Productivity," Working Papers 07-17, Bank of Canada.
  2. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
  3. Francesco Caselli & Nicola Gennaioli, 2007. "Economics and politics of alternative institutional reforms," LSE Research Online Documents on Economics 3557, London School of Economics and Political Science, LSE Library.
  4. Dilip Mookherjee & Ulf von Lilienfeld-Toal & Sujata Visaria, 2010. "The Distributive Impact Of Reforms In Credit Enforcement: Evidence From Indian Debt Recovery Tribunals," Boston University - Department of Economics - Working Papers Series WP2010-034, Boston University - Department of Economics.
  5. Besley, Timothy J. & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
  6. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
  7. 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.
  8. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
  9. Nicola Gennaioli & Stefano Rossi, 2006. "Contractual resolutions of financial distress," Economics Working Papers 1316, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2012.
  10. Andreas Madestam, 2008. "Informal Finance: A Theory of Moneylenders," Working Papers 347, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.

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