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Legal Rules and Bankruptcy Rates: Historical Evidence from the States

American University Economics Working Paper No. 2006-16

49 Pages Posted: 2 Jan 2007  

Bradley A. Hansen

University of Mary Washington - Department of Economics

Mary Hansen

American University - Department of Economics

Date Written: December 2006

Abstract

Since the early twentieth century, observers have attributed the wide variation in state bankruptcy rates to variation in state legal rules such as garnishment and bankruptcy exemptions. Recent econometric analyses, however, conclude that legal rules do not matter. We explore the impact of legal rules on bankruptcy rates using a new technique - fixed effects vector decomposition - to exploit historical variation in legal rules. The technique allows us to estimate the impact of time-invariant legal rules in a fixed effects framework. We find that the variation in state legal rules explains much of the variation in state wage earner bankruptcy rates for 1926 to 1932.

Keywords: bankruptcy, fixed effects vector decomposition, law and economics

JEL Classification: N4, K4

Suggested Citation

Hansen, Bradley A. and Hansen, Mary, Legal Rules and Bankruptcy Rates: Historical Evidence from the States (December 2006). American University Economics Working Paper No. 2006-16. Available at SSRN: https://ssrn.com/abstract=954393 or http://dx.doi.org/10.2139/ssrn.954393

Bradley A. Hansen (Contact Author)

University of Mary Washington - Department of Economics ( email )

1301 College Avenue
Fredericksburg, VA 22401
United States
(540) 654-1484 (Phone)

Mary Hansen

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

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