Bankruptcy Law, Entrepreneurship, and Economic Performance

1
Bankruptcy Law, Entrepreneurship, and Economic
Performance

• David M. Primo William Scott Green
• University of Rochester University of Miami
• Kauffman Summer Legal Institute
• July 12, 2008

2
Entrepreneurship and the Economy

• Entrepreneurship is viewed as a vital component
  of a vibrant economy
• The U.S. vs. Europe
• The underprovision threat
• Spillovers from innovation
• The need to internalize benefits
• Big question Which governmental institutions
  move us toward an optimal level of
  entrepreneurship?

3
Failure and Entrepreneurship

• Failure as a badge of honor in the U.S.
• Not so elsewhere
• Criminal charges if your business fails in
  Lithuania
• The stigma of failure in France
• Can states do more?
• One possibility is partial insurance against
  downside risk

4
Bankruptcy Laws

• Redemption through the courts
• Exemptions
• Vary by state
• Homestead exemption (unlimited in 8 states)
• Other property exemptions
• Bankruptcy laws reduce risks
• Encourages entrepreneurship (Fan White 2003)
• But, creates a moral hazard problem
• The role of creditors

5
Another State-level InstitutionTax and
Regulatory Policy

• A paradox high state personal income tax rates
  should encourage entrepreneurship
• Losses are tax-deductible, so Treasury becomes a
  partner (Domar and Musgrave 1944)
• But, high tax rates create an unfavorable
  economic environment more generally

6
Approach

• First step Does entrepreneurship lead to
  improved economic performance?
• Next step Which institutions encourage
  innovative entrepreneurship?

7
Key Dependent Variables

• Economic Performance
• Economic Growth
• Unemployment
• Entrepreneurship, measured in two ways
• Self-employment
• Venture capital (innovative e-ship)
• 10-year lag as independent variable in economic
  performance specifications

8
Key Independent Variables

• 1980-1996 for the 50 states
• Bankruptcy laws
• Various functions using exemption levels
• Exemption levels range from 10K to
  315K/unlimited
• Taxes
• Tax Foundations estimate of tax burden
• Ranges from 26-36
• Other variables
• religiosity, education, per capita income,
  population, population growth

9
Results Economic Performance

• Entrepreneurship leads to higher growth
• 10 more VC per capita .2 higher growth
• Results mixed for unemployment
• High taxes stifle growth
• taking an additional of state income lowers
  growth by .2 - .4

10
Results Entrepreneurship

• Bankruptcy laws have non-monotonic effect on
  self-employment (consistent with Fan and White
  2003)
• These laws have no effect on innovative
  entrepreneurship (as measured through VC inflows)
• Tax burden has little effecta puzzle

11
What We Have Learned

• Robust link between entrepreneurship and economic
  growth
• Modest link between entrepreneurship and
  bankruptcy laws
• Policy implications?
• Bankruptcy laws important at the margins for
  innovative entrepreneurship
• Focus on taxes and regulations instead

12
The Road Ahead

• The importance of definitions
• A plea for data
• Better measures of entrepreneurship Innovation
  vs. replication
• Better measures of state regulatory burdens
• Greater focus on outcomes associated with
  entrepreneurship