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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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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. 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.
  2. Francesco Caselli & Nicola Gennaioli, 2008. "Economics and Politics of Alternative Institutional Reforms," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 1197-1250, August.
  3. Andreas Madestam, 2009. "Informal Finance: A Theory of Moneylenders," Working Papers 2009.69, Fondazione Eni Enrico Mattei.
  4. Besley, Timothy J. & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
  5. Ulf von Lilienfeld-Toal & Dilip Mookherjee & Sujata Visaria, 2009. "The Distributive impact of reforms in credit enforcement: Evidence from Indian debt recovery tribunals," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 09-03, Indian Statistical Institute, New Delhi, India.
  6. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.
  7. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
  8. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
  9. Hajime Tomura, 2007. "Firms Dynamics, Bankruptcy Laws and Total Factor Productivity," Working Papers 07-17, Bank of Canada.
  10. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
  11. 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.

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