Bankruptcy Law and Entrepreneurship John Armour CBR & Law Faculty, Cambridge University Douglas Cumming Director, Severino Center for Entrepreneurship, Rensselaer Polytechnic Institute CBR Summit: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
Hypothesis “Relaxing severity of personal bankruptcy law will stimulate entrepreneurship” Severity ≈ time to discharge (if any), exemptions, disabilities CBR Summit: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
Summary of Key Results Eurostat Self Compendia Self Employment Data Employment Data - - Bankruptcy Law (low #s better) + 0 MSCI Stock Market Returns + 0 GDP Growth 0 0 Income – Capital Gains Tax 0 0 Patents (lagged) 0 0 Internet Bubble 0 0 Time Trend CBR Summit: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
Figure 2. Self Employment / Population, 1990 - 2002 0.12 0.1 0.08 Averages 0.06 1990 - 2002 0.04 0.02 Self Employment / Population 0 Time to Discharge in Bankruptcy / 1000 Ireland Canada Finland Belgium UK Sweden Real GDP Growth Austria Netherlands France Denmark Germany US Portugal Italy Spain CBR Summit: 29-30 March 2006 Innovation and Governance
Table 2. Summary Statistics Self Employment/Population Self Employment/Population Full Sample Including All All Countries, Excluding Italy, Test # Countries Portugal, and Spain Average Value Difference Test Average Value Difference Test Real GDP Return > 0 0.060 0.052 1 0.374 0.126 Real GDP Return < 0 0.059 0.052 MSCI Index Return > 0 0.060 0.052 2 2.659*** -0.568 MSCI Index Return < 0 0.053 0.053 Years 1999 and 2000 Only 0.060 0.053 3 0.053 0.061 All Other Years (1990-2002) 0.060 0.052 No fresh start 0.064 0.050 4 3.045*** -3.000*** Fresh start available 0.055 0.055 # Start-up Procedures > 6.5 0.064 0.048 5 3.074*** -4.628*** # Start-up Procedures < 6.5 0.056 0.056 CBR Summit: 29-30 March 2006 Innovation and Governance
Table 4. Regression Analyses of Self Employment / Population EUROSTAT DATA Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Country Fixed Effects? Yes Yes Yes Yes Yes Yes Yes Time to Discharge -0.000091*** -0.000093*** -0.000095*** -0.000095*** -0.000095*** -0.000108*** -0.000116*** Real GDP Growth 0.02246* 0.02195* 0.02197* 0.02137* 0.02797** 0.02978** MSCI Index 4.22E-03 4.24E-03 5.67E-03 5.00E-03 4.14E-03 Patents -4.98E-09 -7.83E-08 -4.78E-08 1.84E-08 Income - Capital Gains Tax 1.02E-04 1.19E-04 1.42E-04 Dummy for 1999 and 2000 -0.00097* -8.55E-04 Time Trend -5.34E-05 Number of Observations 195 195 195 195 180 156 195 Adjusted R 2 0.98 0.98 0.98 0.98 0.98 0.98 0.98 F-Statistic 608.06*** 579.21*** 542.44*** 509.41*** 481.70 460.54 437.51 Loglikelihood Function 862.22 864.28 864.34 864.34 864.71 865.86 866.18 Akaike Information Statistic -8.68 -8.69 -8.68 -8.67 -8.66 -8.67 -8.66 CBR Summit: 29-30 March 2006 Innovation and Governance
Table 5. Further Robust Checks: Regression Analyses of Self-Employed Business Owners / Total Labour Force COMPENDIA DATA Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Models (7) Country Fixed Effects? Yes Yes Yes Yes Yes Yes Yes Time to Discharge -0.00016*** -0.00015*** -0.00018*** -0.00019*** -0.00019*** -0.00022*** -0.00034*** Real GDP Growth -0.03529 -0.06258 -0.06146 -0.05767 -0.02146 -0.02273 MSCI Index 0.07675* 0.08524* 0.08251* 0.06102 0.08503* Patents -0.000001** -0.000001* -0.000001 0.0000001 Income - Capital Gains Tax -0.00023 -0.00014 0.00015 Dummy for 1999 and 2000 -0.00333 -0.00064 Time Trend -0.00075*** Number of Observations 105 105 105 105 105 105 105 Adjusted R 2 0.97 0.97 0.97 0.97 0.97 0.97 0.97 F-Statistic 203.50*** 189.77*** 182.42*** 172.56*** 162.15*** 155.15*** 166.03*** Loglikelihood Function 369.30 369.60 -9.56 371.94 372.12 373.09 379.67 Akaike Information Statistic -6.73 -6.72 -6.73 -6.72 -6.71 -6.71 -6.81 CBR Summit: 29-30 March 2006 Innovation and Governance
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: 29-30 March 2006 Innovation and Governance
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 CBR Summit: 29-30 March 2006 Innovation and Governance
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