Bankruptcy and Investment: Evidence from Changes in Marital Property Laws in the U.S. South, 1840-1850

Abstract

We study the impact of the introduction of a form of bankruptcy protection on household investment in the U.S. South in the 1840s, which predated modern bankruptcy laws. During this period, certain southern states passed laws that protected married women's property from seizure in the case of insolvency, amending the common law default which vested a wife's property in her husband and thus allowed it to be seized for the repayment of his debts. Importantly, these laws only applied to newlyweds. We compare couples married after the passage of a law with couples from the same state who married before the passage of a law. Since states passed laws at different points in time, we can exploit variation in protection conditional on state and year of marriage. We find that the effect on household investment was heterogeneous: if most household wealth came from the husband (wife), the law led to an increase (decrease) in investment. This is consistent with a simple model where downside protection leads to both an increase in the demand for credit and a reduction in supply. Demand effects will only dominate if a modest fraction of total wealth is protected.