Personal Bankruptcy and the Level of Entrepreneurial Activity

Wei Fan and Michelle White

No 9340, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of non-corporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore the probability of owning a business increases as the exemption level rises. We test this prediction and find that the probability of households owning businesses is 35% higher if they live in states with unlimited rather than low exemptions. We also find that the probability of starting a business and the probability of owning a corporate rather than non-corporate business are higher for households that live in high exemption states.

JEL-codes: E6 K2 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-ent and nep-law
Note: CF LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Fan, Wei and Michelle J. White. "Personal Bankruptcy And The Level Of Entrepreneurial Activity," Journal of Law and Economics, 2003, v46(2,Oct), 545-567.

Downloads: (external link)
http://www.nber.org/papers/w9340.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9340

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9340

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().