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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SOEPpapers on Multidisciplinary Panel Data Research ; No. 358

Classification and Topics

• Classification: Wirtschaft ; Personal Bankruptcy Law ; Bankruptcy; Liquidation ; Entrepreneurship
• Subject: Personal bankruptcy law ; insolvency ; entrepreneurship ; fresh start ; Insolvenz ; Unternehmer ; Kreditgeschäft ; Zins ; Kreditrationierung ; Kreditsicherung ; Anreiz ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fossen, Frank M.
• Event: Veröffentlichung
• (who): Deutsches Institut für Wirtschaftsforschung (DIW)
• (where): Berlin
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/150903
• Last update: 10.03.2025, 11:43 AM CET