The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of non-corporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore the probability of owning a business increases as the exemption level rises. We test this prediction and find that the probability of households owning businesses is 35% higher if they live in states with unlimited rather than low exemptions. We also find that the probability of starting a business and the probability of owning a corporate rather than non-corporate business are higher for households that live in high exemption states.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9340.
Length: Date of creation: Nov 2002 Date of revision: Handle: RePEc:nbr:nberwo:9340
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Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook K2 - Law and Economics - - Regulation and Business Law
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