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Credit, wages and bankruptcy laws

Author

Listed:
  • Bruno Biais

    (CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Thomas Mariotti

    (GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

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

Suggested Citation

  • Bruno Biais & Thomas Mariotti, 2009. "Credit, wages and bankruptcy laws," Post-Print halshs-00491756, HAL.
    • Handle: RePEc:hal:journl:halshs-00491756
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    Cited by:

    1. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," The 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. Anyangah, Joshua O., 2017. "Creditor rights protection, tort claims and credit," International Review of Law and Economics, Elsevier, vol. 52(C), pages 29-43.
    5. Madestam, Andreas, 2014. "Informal finance: A theory of moneylenders," Journal of Development Economics, Elsevier, vol. 107(C), pages 157-174.
    6. Kolecek, Ludek, 2008. "Bankruptcy laws and debt renegotiation," Journal of Financial Stability, Elsevier, vol. 4(1), pages 40-61, April.
    7. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.
    8. Rossi, Stefano & Yun, Hayong, 2024. "The political economy of municipal bankruptcy," Economics Letters, Elsevier, vol. 239(C).
    9. Ondøej Knot & Ondøej Vychodil, 2005. "What Drives the Optimal Bankruptcy Law Design? (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 110-123, March.
    10. N.V.V. Satyanarayana Puchakayala & Ramanujam Veluchamy, 2023. "Optimal bankruptcy regime: a literature review," Future Business Journal, Springer, vol. 9(1), pages 1-10, December.
    11. Alejandro Van der Ghote & Luc Laeven & Victoria Vanasco & Alberto Martin & Vladimir Asriyan, 2021. "Falling Interest Rates and Credit Misallocation: Lessons from General Equilibrium," Working Papers 1268, Barcelona School of Economics.
    12. Besley, Timothy & Ghatak, Maitreesh, 2009. "The de Soto effect," LSE Research Online Documents on Economics 25429, London School of Economics and Political Science, LSE Library.
    13. Tarantino, Emanuele, 2013. "Bankruptcy law and corporate investment decisions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2490-2500.
    14. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
    15. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2025. "Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(4), pages 2197-2227.
    16. Koji Asano, 2022. "Trust and Law in Credit Markets," Economica, London School of Economics and Political Science, vol. 89(354), pages 332-361, April.
    17. Priit Jeenas & Alberto Martin & Vladimir Asriyan, 2026. "Frost and Fire: A Tale of Two Crises," Working Papers 1567, Barcelona School of Economics.
    18. Morelli, Massimo & Ghatak, Maitreesh & Aney, Madhav, 2011. "Can Market Failure Cause Political Failure," CEPR Discussion Papers 8533, C.E.P.R. Discussion Papers.
    19. 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

    Keywords

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    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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