Bankruptcy Law and Entrepreneurship (CBR project)

Overview

Aims and objectives

This project investigated the relationship between personal insolvency laws and entrepreneurship. The hypothesis examined was that the ‘severity’ of the consequences of personal insolvency has an impact on the incentives of potential entrepreneurs, and that a relaxation in the insolvency regime may be expected to stimulate business startup. This issue is of interest to policy-makers, for it forms the intuition underpinning the reduction, under the Enterprise Act 2002, in the time to discharge from bankruptcy from 3 years to one year.

An index of personal bankruptcy laws was constructed for 15 European and North American countries over the period 1990-2002. Data on self-employment were also collected (two different datasets were used to provide a robustness check), and the relationship between changes in personal bankruptcy law and self-employment was investigated using a country fixed effects methodology to focus on the impact of the changes and control for other cross-country variations.

Results and dissemination

The results indicate that the introduction of a ‘fresh start’ in bankruptcy, and reductions in the amount of time until this is available, are associated with increases in the level of self-employment. Moreover, in our dataset, the effect is more statistically significant than changes in GDP growth, stock market returns, and a variety of other legal and economic factors.

Principal investigators

• John Armour
• Doug Cumming

Project status

Completed

Project dates

2006-2007

Funding

Insolvency Service Grant