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Two Hundred Years of Bankruptcy: A Tale of Legislation and Economic Fluctuations

Listed author(s):
  • Ian Domowitz
  • Elie Tamer

We investigate two interrelated questions concerning the institution of bankruptcy. First, is there a link between legislative activity and business cycle fluctuations, and if so, what is its character? Legislative activity from 1790 through 1994 is documented and matched with business cycle data. A historical description is provided for the period prior to the availability of reliable data on aggregate income and related statistics. Alternative statistical models are formulated and estimated, beginning with data in 1830. The historical discussion and empirical analysis support the proposition that legislative initiatives with respect to bankruptcy are countercyclical in nature. This finding complements much current literature on institutional change, which places an emphasis on constituency interests and consensus building in the timing of legislation. Second, do legal changes affect the level of bankruptcy activity in the aggregate? This question is motivated by theoretical considerations, previous work on the impact of the 1978 Bankruptcy Reform Act, and current creditor arguments that lenient statutes contribute to large increases in bankruptcy filing rates. We provide a model that links observed filing activity to the notion of a frictional bankruptcy rate, driven by income, debt, interest rate, and inflation factors. The null hypothesis of no legislative impact on filings cannot be rejected for pro-creditor legislation, but is rejected for pro-debtor initiatives, taking legislation since 1898 into account. This finding is attributable to developments prior to 1939, however. Over the 1939-1992 period, we find little support for legislative impacts on filings, in both the short and long run.

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Paper provided by Institute for Policy Resarch at Northwestern University in its series IPR working papers with number 97-25.

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Date of creation:
Handle: RePEc:wop:nwuipr:97-25
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