Legal Rules and Bankruptcy Rates: Historical Evidence from the States

Abstract

Since the early twentieth century, observers have attributed the wide variation in state bankruptcy rates to variation in state legal rules such as garnishment and bankruptcy exemptions. Recent econometric analyses, however, conclude that legal rules do not matter. We explore the impact of legal rules on bankruptcy rates using a new technique—fixed effects vector decomposition—to exploit historical variation in legal rules. The technique allows us to estimate the impact of timeinvariant legal rules in a fixed effects framework. We find that the variation in state legal rules explains much of the variation in state wage earner bankruptcy rates for 1926 to 1932.Bankruptcy, fixed effects vector decomposition, law and economics