Credit, Wages and Bankruptcy Laws

35 Pages Posted: 16 Sep 2003

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Thomas Mariotti

University of Toulouse I

Date Written: August 2003

Abstract

We study the impact of different bankruptcy laws in general equilibrium, taking into account the interactions between the credit and labour markets, as well as wealth heterogeneity. Soft bankruptcy laws often preclude liquidation, to avoid ex-post inefficiencies. This worsens credit rationing, depresses investment and reduces aggregate leverage. Yet, tough laws do not necessarily maximize social welfare or emerge from the legislative process. Relatively rich agents can invest irrespective of the law. They favour soft laws that exclude poorer entrepreneurs from the market and thus reduce labour demand and wages. This raises the pledgeable income of the entrepreneurs who still can raise funds, and thus lowers their liquidation rates and the associated inefficiencies. Hence, a soft law can maximize social welfare.

Keywords: Financial constraints, credit rationing, bankruptcy law

JEL Classification: D82, G33, K22

Suggested Citation

Biais, Bruno and Mariotti, Thomas, Credit, Wages and Bankruptcy Laws (August 2003). Available at SSRN: https://ssrn.com/abstract=445722

Bruno Biais (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thomas Mariotti

University of Toulouse I ( email )

Toulouse, 31000
France

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