Bankruptcy Law and Entrepreneurship

Abstract

Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, little attention has been paid to the question empirically. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 13 years (1990-2002) and 15 countries in Europe and North America. We compile a new index of the level of how ‘forgiving’ personal bankruptcy laws are, reflecting the time to discharge. This measure varies over time and across the countries studied. We show that bankruptcy law has a more statistically and economically significant effect on self employment rates relative to GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.Personal Bankruptcy Law, Entrepreneurship