Working Paper: NBER ID: w9340
Authors: Wei Fan; Michelle J. White
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.
Keywords: No keywords provided
JEL Codes: E6; K2; M13; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher bankruptcy exemption levels (K35) | increased probability of households owning businesses (R21) |
| higher bankruptcy exemption levels (K35) | increased probability of starting a business (M13) |
| higher bankruptcy exemption levels (K35) | increased likelihood of owning a corporate business (L26) |
| higher bankruptcy exemption levels (K35) | increased likelihood of owning a noncorporate business (L26) |
| higher bankruptcy exemption levels (K35) | potential negative relationship at excessively high levels (D62) |