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

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  • Fossen, Frank M.

    ()
    (Free University of Berlin)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5459.

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Length: 44 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5459

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

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References

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  1. Jenkins, Stephen P, 1995. "Easy Estimation Methods for Discrete-Time Duration Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 129-38, February.
  2. 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.
  3. Caliendo, Marco & Fossen, Frank M. & Kritikos, Alexander S., 2006. "Risk Attitudes of Nascent Entrepreneurs: New Evidence from an Experimentally-Validated Survey," IZA Discussion Papers 2168, Institute for the Study of Labor (IZA).
  4. Marco Caliendo & Frank Fossen & Alexander S. Kritikos, 2008. "The Impact of Risk Attitudes on Entrepreneurial Survival," Working Papers, Hanseatic University, Germany, Department of Economics 012, Hanseatic University, Germany, Department of Economics.
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  6. Richard Blundell & Monica Costa Dias, 2002. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP10/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  7. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
  8. 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.
  9. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 217-51, February.
  10. John Armour & Douglas Cumming, 2008. "Bankruptcy Law and Entrepreneurship," American Law and Economics Review, Oxford University Press, vol. 10(2), pages 303-350.
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  13. repec:feb:framed:0019 is not listed on IDEAS
  14. 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.
  15. Julian R. Franks & Kjell G. Nyborg & Walter N. Torous, 1996. "A Comparison of UK, US and German Insolvency Codes," Financial Management, Financial Management Association, Financial Management Association, vol. 25(3), Fall.
  16. Césaire A. Meh & Yaz Terajima, 2008. "Unsecured Debt, Consumer Bankruptcy, and Small Business," Working Papers, Bank of Canada 08-5, Bank of Canada.
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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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