A Spatial Model of the Impact of State Bankruptcy Exemptions on Entrepreneurship

This is the first paper that highlights the role of spatial interactions, in the context of state bankruptcy laws, in the entrepreneurship decision. The focus of the paper is on small businesses. Small and medium enterprises represent between 96 percent to 99 percent of all enterprises in the US. This paper asks whether laws that facilitate easy exit are an important consideration in entry of small businesses. The study uses U.S. data, since the U.S. has sufficient variation in bankruptcy law across states. This paper studies the decision of an individual to begin (or end) a business in a particular state, as a function of bankruptcy regulations and other macroeconomic and business variables in that state as well as those in neighboring states. I use spatial econometric techniques to model these interactions. The study uses longitudinal data from the SIPP dataset. Model estimation is computationally challenging due to the large number of observations and the presence of a lagged endogenous variable, individual random effects, and state dummies. The paper finds that higher bankruptcy exemptions in neighboring states lower the probability of starting a business in the state of residence. The bankruptcy exemption in one’s own state has a significant and positive impact on entrepreneurship.