American Law and Economics Review Advance Access originally published online on August 1, 2008
American Law and Economics Review 2008 10(2):303-350; doi:10.1093/aler/ahn008
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Bankruptcy Law and Entrepreneurship
University of Oxford
York University
Send correspondence to: John Armour, Lovells Professor of Law and Finance, University of Oxford, Oriel College, Oxford OX1 4EW, UK; E-mail: john.armour{at}law.ox.ac.uk, or Douglas Cumming, Associate Professor and Ontario Research Chair, Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada; E-mail: douglas{at}cumming.com.
JEL Classification: K35, M13
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Abstract |
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Recent initiatives in a number of countries have sought to promote entrepreneurship through relaxing the legal consequences of personal bankruptcy. Whilst there is an intuitive link, relatively little attention has been paid to the question empirically, particularly in the international context. We investigate the relationship between bankruptcy laws and entrepreneurship using data on self-employment over 16 years (1990–2005) and fifteen countries in Europe and North America. We compile new indices reflecting how "forgiving" personal bankruptcy laws are. These measures vary over time and across the countries studied. We show that bankruptcy law has a statistically and economically significant effect on self-employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors.
We gratefully acknowledge financial support from the UK Insolvency Service. In gathering data on bankruptcy laws, use was made of facilities in the Bodleian Law Library in Oxford, the Max Planck Institute for Foreign and International Private Law in Hamburg, and the Arthur W. Diamond Library at Columbia Law School, and we are grateful to these institutions for their assistance. We also thank Thomas Bachner, Ulrik Rammeskow Bang-Pedersen, Guy Horsmans, Monique Koppert-Van Beek, Jesper Lau Hansen, Johanna Niemi-Kiesiläinen, Erik Stam, Lorenzo Stanghellini, Daniel Stattin and Felix Steffek for their assistance in the construction of the indices of bankruptcy laws. All remaining errors are our sole responsibility. This paper has benefited from comments by Jeff Gordon, Peter Johnson, Simon Parker, Steve Schwarcz, Alan Schwartz, Julia Shvets, Erik Stam, and an anonymous referee, as well as from seminar participants at the Australian Graduate School of Entrepreneurship AGSE International Entrepreneurship Research Exchange, the American Law and Economics Association Annual Conference, an Insolvency Service Research Seminar and an ESRC/SBS Seminar at Cambridge University.
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