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

Abstract

A personal bankruptcy law that allows for a “fresh start” not only reduces the individual risk involved in entrepreneurship, but may also lead to higher interest rates charged by creditors. Both effects are less relevant for wealthy potential entrepreneurs. 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 quasi-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 encourages less wealthy individuals to enter into entrepreneurship.