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Personal Bankruptcy Law and Innovation around the World

Author

Listed:
  • Douglas Cumming
  • Randall Morck
  • Zhao Rong
  • Minjie Zhang

Abstract

Creditors financing risky entrepreneurial firms often require founders to pledge personal assets, effectively contracting around corporate limited liability. Personal bankruptcy law (PBL), which governs individuals’ access to debt discharge following failure, therefore shapes innovation incentives. Difference-in-difference tests across 33 non-U.S. economies from 1990 to 2002 show that debtor-friendly PBL reforms significantly increase patent filings, subsequent patent citations, and new patenter débuts. These effects are concentrated among firms without large legacy patent portfolios, consistent with creditors primarily demanding personal guarantees from unestablished innovators. Critically, debtor-friendly PBL reforms reallocate innovation away from industries with low innovation potential to industries with high innovation potential, whereafter productivity growth spikes. These findings suggest debtor-friendly PBL reforms improve the cross-industry allocative efficiency of innovation, perhaps by encouraging disruptive entrants.

Suggested Citation

  • Douglas Cumming & Randall Morck & Zhao Rong & Minjie Zhang, 2024. "Personal Bankruptcy Law and Innovation around the World," NBER Working Papers 32826, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32826
    Note: CF
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    File URL: http://www.nber.org/papers/w32826.pdf
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    Cited by:

    1. RIUTORT, Julio & VALLEJOS, Benjamín, 2025. "Voluntary bankruptcy and long-term credit exclusion: evidence from Chile," Economics Letters, Elsevier, vol. 257(C).

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G5 - Financial Economics - - Household Finance
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • P1 - Political Economy and Comparative Economic Systems - - Capitalist Economies
    • P50 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - General

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