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Credit, Wages, and Bankruptcy Laws

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  • Bruno Biais
  • Thomas Mariotti

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.

Suggested Citation

  • Bruno Biais & Thomas Mariotti, 2009. "Credit, Wages, and Bankruptcy Laws," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 939-973, September.
  • Handle: RePEc:tpr:jeurec:v:7:y:2009:i:5:p:939-973
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    Cited by:

    1. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 602-634.
    2. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
    3. Hajime Tomura, 2007. "Firms Dynamics, Bankruptcy Laws and Total Factor Productivity," Staff Working Papers 07-17, Bank of Canada.
    4. repec:eee:irlaec:v:52:y:2017:i:c:p:29-43 is not listed on IDEAS
    5. Tarantino, Emanuele, 2013. "Bankruptcy law and corporate investment decisions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2490-2500.
    6. Madestam, Andreas, 2014. "Informal finance: A theory of moneylenders," Journal of Development Economics, Elsevier, vol. 107(C), pages 157-174.
    7. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, 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. Aney, Madhav S. & Ghatak, Maitreesh & Morelli, Massimo, 2016. "Credit market frictions and political failure," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 48-64.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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