Unsecured Debt, Consumer Bankruptcy, and Small Business

Staff Working Papers from Bank of Canada

Abstract: In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions. In particular, excessive bankruptcy exemptions can be counter-productive. Finally, we argue that entrepreneurial activity is important when studying different bankruptcy rules or regulations.

Keywords: Economic models; Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: D31 E21 J23 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008
New Economics Papers: this item is included in nep-ent, nep-mac and nep-reg
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:08-5

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