Credit, Wages and Bankruptcy Laws

Bruno Biais and Thomas Mariotti

No 3996, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the impact of different bankruptcy laws in general equilibrium, taking into account the interactions between the credit and labour markets, as well as wealth heterogeneity. Soft bankruptcy laws often preclude liquidation, to avoid ex-post inefficiencies. This worsens credit rationing, depresses investment and reduces aggregate leverage. Yet, tough laws do not necessarily maximize social welfare or emerge from the legislative process. Relatively rich agents can invest irrespective of the law. They favour soft laws that exclude poorer entrepreneurs from the market and thus reduce labour demand and wages. This raises the pledgeable income of the entrepreneurs who still can raise funds, and thus lowers their liquidation rates and the associated inefficiencies. Hence, a soft law can maximize social welfare.

Keywords: Financial constraints; Credit rationing; Bankruptcy law (search for similar items in EconPapers)
JEL-codes: D82 G33 K22 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-ent, nep-law and nep-rmg
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Credit, wages and bankruptcy laws (2009)
Working Paper: Credit, Wages and Bankruptcy Laws (2008)
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