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Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"

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  • Frank M. Fossen

Abstract

A personal bankruptcy law that allows for a "fresh start" after bankruptcy reduces the individual risk involved in entrepreneurial activity. On the other hand, as risk shifts to creditors who recover less of their credit after a debtor's bankruptcy, lenders may charge higher interest rates or ration credit supply, which can hamper entrepreneurship. Both aspects of a more forgiving personal bankruptcy law are less relevant for wealthy potential. - entrepreneurs who still risk losing their wealth, but tend not to face higher interest rates because they provide collateral. This paper illustrates these effects in a model and tests the hypotheses derived by exploiting the introduction of a "fresh start" policy in Germany in 1999 as a natural experiment, based on representative household panel data. The results indicate that the insurance effect of a more forgiving personal bankruptcy law exceeds the interest effect and on balance encourages less wealthy individuals to enter into entrepreneurship.

Suggested Citation

  • Frank M. Fossen, 2011. "Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"," SOEPpapers on Multidisciplinary Panel Data Research 358, DIW Berlin, The German Socio-Economic Panel (SOEP).
    • Handle: RePEc:diw:diwsop:diw_sp358
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    Cited by:

    1. Dr. Petra Gerlach & Seán Lyons, 2015. "Mortgage arrears in Europe: The impact of monetary and macroprudential policies," Working Papers 2015-05, Swiss National Bank.
    2. Iain Ramsay, 2012. "Between Neo-Liberalism and the Social Market: Approaches to Debt Adjustment and Consumer Insolvency in the EU," Journal of Consumer Policy, Springer, vol. 35(4), pages 421-441, December.
    3. Giacomo Corneo, 2013. "A Note on the Taxation of Couples Under Income Uncertainty," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 129-134, March.
    4. Michael Fritsch & Alexander S. Kritikos & Alina Sorgner, 2015. "Why did self-employment increase so strongly in Germany?," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 27(5-6), pages 307-333, June.
    5. Schöb, Ronnie & Thum, Marcel, 2011. "Job protection renders minimum wages less harmful," Discussion Papers 2011/14, Free University Berlin, School of Business & Economics.
    6. Michael Fritsch & Alexander Kritikos & Alina Sorgner, 2013. "Drivers of Self-Employment - A Multivariate Decomposition Analysis for the Case of Germany," Jena Economics Research Papers 2013-006, Friedrich-Schiller-University Jena.

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    More about this item

    Keywords

    Personal bankruptcy law; insolvency; entrepreneurship; fresh start;
    All these keywords.

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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