This paper characterizes the optimal bankruptcy exemption for risk averse borrowers who use unsecured contracts but have the possibility of defaulting. It provides a novel general formula — which holds in a wide variety of environments — for the optimal exemption as a function of a few observable sufficient statistics. Knowledge of borrowers’ leverage, the sensitivity of the interest rate sched...

This paper examines the effects of liability-sharing rules on social welfare and risk reduction when one firm (the principal) delegates indivisible hazardous activities to one of the potential firms (the agents). The problem is posed as providing incentives from the principal to the agents, through the contract, to reduce the level of accident probability under a liability rule in force. Our ma...

We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obligation to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for r...

We develop a real options perspective to explore how an entrepreneur-friendly bankruptcy law can encourage entrepreneurship development at the societal level. If bankrupt entrepreneurs are excessively punished for failure, they may let inherently high-risk but potentially high-return opportunities pass. We suggest that a more entrepreneur-friendly bankruptcy law, informed by a real options logi...

This paper demonstrates the important role of job displacement in the household bankruptcy decision. I develop a dynamic, forward-looking model of unemployment and bankruptcy where persistent negative income shocks increase a household’s likelihood of filing for bankruptcy both immediately and in the future. Consistent with the model’s predictions, I find that households in the NLSY are four ti...

In this paper, we investigate whether and how personal bankruptcy law a ects small rms' access to credit. When a rm is unincorporated, its debts are personal liabilities of the rm's owner, so that lending to the rm is equivalent to lending to its owner. If the rm fails, the owner has an incentive to le for personal bankruptcy in order to obtain discharge of the rm's debts. While bankruptcy law ...

Article history: Received 20 May 2009 Received in revised form 26 April 2010 Accepted 18 May 2010 Available online 26 June 2010 How do bankruptcy laws as formal institutions affect entrepreneurship development around the world? Do entrepreneur-friendly bankruptcy laws encourage more entrepreneurship development at a societal level? We posit that if bankrupt entrepreneurs are excessively punishe...

The recent world financial crisis has increased the number of bankruptcies in numerous countries and has resulted in a new area of research which responds to the need to predict this phenomenon, not only at the level of individual countries, but also at a global level, offering explanations of the common characteristics shared by the affected companies. Nevertheless, few studies focus on the pr...