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The impact of personal bankruptcy law on entrepreneurship

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  • Ye (George) Jia

Abstract

I study the two competing effects of limited personal liability on entrepreneurship in a life‐cycle model: an insurance effect through debt relief in the event of business failure and a borrowing cost effect where the borrowing cost rises with default premiums. I first calibrate the model to the US economy by taking a simplified version of the US Chapter 7 bankruptcy code and then consider the effects of alternative regimes. I find that personal bankruptcy law affects entrepreneurship primarily by altering the decisions of agents with moderate entrepreneurial ability through the insurance effect rather than through the borrowing cost effect. L'impact de la loi sur les faillites personnelles sur l'entrepreneuriat. On étudie les deux effets concurrents des lois sur la responsabilité personnelle limitée sur l'entrepreneuriat dans un modèle de cycle de vie: un effet d'assurance qui réduit le fardeau de la dette dans le cas de faillite, et un effet sur les coûts d'emprunt qui s'accroissent à cause de la prime attribuable au défaut de paiement. On applique d'abord le modèle à l'économie américaine en utilisant une version simplifiée du code de faillite en vogue aux États‐Unis (Chapter 7) avant de considérer les effets de régimes de rechange. On découvre que le cadre légal pour les faillites personnelles affecte l'entrepreneuriat, surtout en modifiant les décisions des agents qui ont des habiletés entrepreneuriales modérées à travers l'effet d'assurance plutôt qu'à travers l'effet sur les coûts d'emprunt.

Suggested Citation

  • 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.
  • Handle: RePEc:wly:canjec:v:48:y:2015:i:2:p:464-493
    DOI: 10.1111/caje.12133
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    1. Mankart, Jochen & Rodano, Giacomo, 2015. "Personal bankruptcy law, debt portfolios, and entrepreneurship," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 157-172.
    2. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    3. Alessandro Melcarne & Giovanni B. Ramello, 2020. "Bankruptcy delay and firms’ dynamics," Small Business Economics, Springer, vol. 54(2), pages 405-419, February.
    4. György Walter & Jens Valdemar Krenchel, 2021. "The Leniency of Personal Bankruptcy Regulations in the EU Countries," Risks, MDPI, vol. 9(9), pages 1-20, September.

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    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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