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Credit, Wages and Bankruptcy Laws

  • Biais, Bruno
  • Mariotti, Thomas

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.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 289.

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Date of creation: Jan 2008
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Publication status: Published in Journal of the European Economic Association, vol. 7, n°5, septembre 2009, p. 939-973.
Handle: RePEc:ide:wpaper:1568
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