Credit, wages and bankruptcy laws

Bruno Biais and Thomas Mariotti
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Thomas Mariotti: GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: 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

Keywords: BANKRUPTCY; CREDIT; WAGES; JOBcreation; EMPLOYMENT (Economic theory); PARETO optimum; SOFT law (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (12)

Published in Journal of the European Economic Association, 2009, 7 (5), pp.939-973

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Related works:
Working Paper: Credit, Wages and Bankruptcy Laws (2008)
Working Paper: Credit, Wages and Bankruptcy Laws (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00491756

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