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The Bankruptcy Reform Act of 2005 and Entrepreneurial Activity

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  • Yongwook Paik

Abstract

This paper empirically investigates the effect of the Bankruptcy Reform Act of 2005 on entrepreneurial activity. We find that this act had virtually no noticeable effect on the overall level of entrepreneurship, measured by self‐employment, partly because potential entrepreneurs were more likely to seek limited liability to offset the reduction in wealth protection imposed by the new law. That is, the incorporation rate increased for small businesses after the new law was enacted. This increase emphasizes that limited liability provided by incorporation is an important strategic variable that potential entrepreneurs utilize in response to changes in personal bankruptcy law. This study implies that incorporation is an important parameter to consider in understanding the relationship between bankruptcy law and entrepreneurial activity. The policy implication of this study is that entrepreneurs do respond to changes in personal bankruptcy law, even though it is intended for consumers, so this potential side effect should be considered when designing a new law.

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  • Yongwook Paik, 2013. "The Bankruptcy Reform Act of 2005 and Entrepreneurial Activity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 259-280, June.
  • Handle: RePEc:bla:jemstr:v:22:y:2013:i:2:p:259-280
    DOI: 10.1111/gems.2013.22.issue-2
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    10. Dunn, Thomas & Holtz-Eakin, Douglas, 2000. "Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational Links," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 282-305, April.
    11. Michelle White, 2006. "Bankruptcy and small business - lessons from the US and recent reforms," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(1), pages 22-26, 04.
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    Cited by:

    1. Frank M. Fossen & Johannes König, 2016. "Personal Bankruptcy Law and Entrepreneurship," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 28-34, 02.
    2. Chong Kyoon Lee & Johan Wiklund & Alejandro Amezcua & Tae Jun Bae & Almantas Palubinskas, 2022. "Business failure and institutions in entrepreneurship: a systematic review and research agenda," Small Business Economics, Springer, vol. 58(4), pages 1997-2023, April.
    3. TAKAHASHI Hidenori & YAMAKAWA Yasuhiro, 2022. "The Effect of Uncertainty on Entrepreneurial Activity," Discussion papers 22064, Research Institute of Economy, Trade and Industry (RIETI).
    4. Geraldo Cerqueiro & Deepak Hegde & María Fabiana Penas & Robert C. Seamans, 2017. "Debtor Rights, Credit Supply, and Innovation," Management Science, INFORMS, vol. 63(10), pages 3311-3327, October.
    5. Takanori Adachi & Takanori Hisada, 2017. "Gender differences in entrepreneurship and intrapreneurship: an empirical analysis," Small Business Economics, Springer, vol. 48(3), pages 447-486, March.
    6. Traczynski, Jeffrey, 2020. "Tenancy by the Entirety and the Value of Wealth Insurance for Entrepreneurs," IZA Discussion Papers 13173, Institute of Labor Economics (IZA).
    7. Marco Celentani & Miguel García-Posada & Fernando Gómez Pomar, 2022. "Fresh start policies and small business activity: evidence from a natural experiment," Working Papers 2210, Banco de España.
    8. Amanda Ross & Shawn Rohlin, 2013. "State Bankruptcy Law and Entrepreneurship: Evidence from a Border Analysis," ERSA conference papers ersa13p253, European Regional Science Association.
    9. Frank M. Fossen & Johannes König, 2016. "Personal Bankruptcy Law and Entrepreneurship," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(04), pages 28-34, February.
    10. repec:ces:ifodic:v:13:y:2016:i:4:p:19191583 is not listed on IDEAS
    11. Pankaj C. Patel & Srikant Devaraj, 2021. "The state‐level exemption changes in Chapter 7 protection and entrepreneurial activity in the United States," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1089-1104, July.
    12. Ye (George) Jia, 2015. "The impact of personal bankruptcy law on entrepreneurship," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(2), pages 464-493, May.

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