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CBR Summit: Innovation and Governance 29-30 March 2006
Bankruptcy Law and Entrepreneurship
John Armour CBR & Law Faculty, Cambridge University
Douglas Cumming Director, Severino Center for Entrepreneurship,
Rensselaer Polytechnic Institute
CBR Summit: Innovation and Governance 29-30 March 2006
Motivation
• Growing salience of ‘entrepreneurship policy’– Personal bankruptcy law believed to be relevant by UK/EU
policymakers
• Reform of bankruptcy laws– 2004: Enterprise Act facilitates fresh start in UK– 2005: Bankruptcy Reform Act restricts fresh start in US
• No international study shows link between bky law and entrepreneurship across countries
CBR Summit: Innovation and Governance 29-30 March 2006
What determines entrepreneurship? (1)
• Individual characteristics– Risk tolerance (Wagner and Sternberg, 2002)– Optimism (Venkataraman and Lee, 2001; Landier and Thesmar,
2003)– Wealth endowment (e.g. Blanchflower and Oswald, 1997)– Human capital (e.g. Lazear, 2002; Wagner, 2003)
• Economic factors– GDP growth (e.g. Landier, 2002; Fan and White, 2003)
• Cultural factors– Attitudes to risk (e.g. Hofstede et al, 2002)
CBR Summit: Innovation and Governance 29-30 March 2006
What determines entrepreneurship? (2)
• Regional geography– Agglomeration externalities (e.g. Saxenian, 1994)
• Fiscal regime– CGT vs income tax (Poterba, 1989a,b; Gompers and Lerner,
1998)
• Legal regime– IP protection (Gilson, 1999; Lerner, 2002; Bigus, 2004)– Ease of incorporation (Djankov et al, 2002)– Personal bankruptcy law (Fan and White, 2003; Georgellis and
Wall, 2002; Persad, 2004)
CBR Summit: Innovation and Governance 29-30 March 2006
What determines entrepreneurship? (3)
• Bankruptcy Law (US)– Berkowitz and White (2004) Fan and White (2003)– Georgellis and Wall (2002)– Persad (2004)
• Prior empirical work does not– Consider international differences – Consider role of ‘fresh start’
CBR Summit: Innovation and Governance 29-30 March 2006
Hypothesis
“Relaxing severity of personal bankruptcy law will stimulate entrepreneurship”
Severity ≈ time to discharge (if any), exemptions, disabilities
CBR Summit: Innovation and Governance 29-30 March 2006
Intuitions
1. Marginal entrepreneurs (Adler et al, 2000)– Insurance– Incentives– US evidence: Fan and White, 2003; Georgellis and Wall, 2002;
Berkowitz and White, 2004; Persad, 2004.
2. Inframarginal entrepreneurs– Bad projects vs bad luck– Budget constraint vs deadweight loss
CBR Summit: Innovation and Governance 29-30 March 2006
Summary of Key Results
00Income – Capital Gains Tax
00Patents (lagged)
--Bankruptcy Law(low #s better)
00Time Trend
00Internet Bubble
0+GDP Growth
+0MSCI Stock Market Returns
Compendia Self Employment Data
Eurostat Self Employment Data
CBR Summit: Innovation and Governance 29-30 March 2006
Methodology (1)
• Dependent variables– Self Employed / Population (EUROSTAT)– Self Employed (inc. owner-managers) / Work Force
(COMPENDIA)
• Specification (Judge et al, 1988)– Country fixed effects – Data de-trended
CBR Summit: Innovation and Governance 29-30 March 2006
Methodology (2)
• Explanatory variables– Time to discharge (or life expectancy)
– Stock market returns– GDP growth– ‘Internet Bubble’ (2000-2002)– Income – Capital Gains Tax– Patents (lagged)– Time Trend
CBR Summit: Innovation and Governance 29-30 March 2006
Irela
ndC
anad
a
Finl
and
Bel
gium U
K
Sw
eden
Aus
tria
Net
herla
nds
Fran
ce
Den
mar
k
Ger
man
y
US
Por
tuga
l
Italy
Spa
in
Real GDP Growth
Time to Discharge in Bankruptcy / 1000
Self Employment / Population0
0.02
0.04
0.06
0.08
0.1
0.12
Averages1990 - 2002
Figure 2. Self Employment / Population, 1990 - 2002
CBR Summit: Innovation and Governance 29-30 March 2006
Table 2. Summary Statistics
0.0560.056# Start-up Procedures < 6.5-4.628***
0.0483.074***
0.064# Start-up Procedures > 6.55
0.0550.055Fresh start available-3.000***
0.0503.045***
0.064No fresh start4
0.0520.060All Other Years (1990-2002)0.061
0.0530.053
0.060Years 1999 and 2000 Only3
0.0530.053MSCI Index Return < 0-0.568
0.0522.659***
0.060MSCI Index Return > 02
0.0520.059Real GDP Return < 00.126
0.0520.374
0.060Real GDP Return > 01
Difference TestAverage ValueDifference TestAverage Value
Self Employment/PopulationAll Countries, Excluding Italy,
Portugal, and Spain
Self Employment/PopulationFull Sample Including All
CountriesTest #
CBR Summit: Innovation and Governance 29-30 March 2006
-8.66-8.67-8.66-8.67-8.68-8.69-8.68Akaike Information Statistic
866.18865.86864.71864.34864.34864.28862.22Loglikelihood Function
437.51460.54481.70509.41***542.44***579.21***608.06***F-Statistic
0.980.980.980.980.980.980.98Adjusted R2
195156180195195195195Number of Observations
-5.34E-05Time Trend
-8.55E-04-0.00097*Dummy for 1999 and 2000
1.42E-041.19E-041.02E-04Income - Capital Gains Tax
1.84E-08-4.78E-08-7.83E-08-4.98E-09Patents
4.14E-035.00E-035.67E-034.24E-034.22E-03MSCI Index
0.02978**0.02797**0.02137*0.02197*0.02195*0.02246*Real GDP Growth
-0.000116***-0.000108***-0.000095***-0.000095***-0.000095***-0.000093***-0.000091***Time to Discharge
YesYesYesYesYesYesYesCountry Fixed Effects?
Model (7)Model (6)Model (5)Model (4)Model (3)Model (2)Model (1)
EUROSTAT DATA
Table 4. Regression Analyses of Self Employment / Population
CBR Summit: Innovation and Governance 29-30 March 2006
-6.81-6.71-6.71-6.72-6.73-6.72-6.73Akaike Information Statistic
379.67373.09372.12371.94-9.56369.60369.30Loglikelihood Function
166.03***155.15***162.15***172.56***182.42***189.77***203.50***F-Statistic
0.970.970.970.970.970.970.97Adjusted R2
105105105105105105105Number of Observations
-0.00075***Time Trend
-0.00064-0.00333Dummy for 1999 and 2000
0.00015-0.00014-0.00023Income - Capital Gains Tax
0.0000001-0.000001-0.000001*-0.000001**Patents
0.08503*0.061020.08251*0.08524*0.07675*MSCI Index
-0.02273-0.02146-0.05767-0.06146-0.06258-0.03529Real GDP Growth
-0.00034***-0.00022***-0.00019***-0.00019***-0.00018***-0.00015***-0.00016***Time to Discharge
YesYesYesYesYesYesYesCountry Fixed Effects?
Models (7)Model (6)Model (5)Model (4)Model (3)Model (2)Model (1)
COMPENDIA DATA
Table 5. Further Robust Checks: Regression Analyses of Self-Employed Business Owners / Total Labour Force
CBR Summit: Innovation and Governance 29-30 March 2006
Economic Significance
• We show that changes in bankruptcy laws in Europe in the 1990s are consistent with an increase in self employed / population of, e.g.
• 0.008 in Germany (9% of the average self-employment rate in Germany)
• 0.009 in the Netherlands (8% of the average self-employment rate in the Netherlands)
CBR Summit: Innovation and Governance 29-30 March 2006
Implications
• General– Personal bankruptcy law matters for entrepreneurs– In our study, its economic significance is greater than GDP
growth and stock market returns.
• For recent law reforms– UK reforms likely to stimulate entrepreneurship– US reforms the reverse
• NB Limitations / caveats: – Impact on consumer bankruptcies– Welfare implications ambiguous
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