Two
Hundred Years of Bankruptcy:
A Tale of Legislation and Economic Fluctuations
Ian Domowitz and Elie Tamer
Abstract
We investigate two interrelated questions concerning the institution
of bankruptcy. First, is there a link between legislative activity
and business cycle fluctuations, and if so, what is its character?
Legislative activity from 1790 through 1994 is documented and matched
with business cycle data. A historical description is provided for
the period prior to the availability of reliable data on aggregate
income and related statistics. Alternative statistical models are
formulated and estimated, beginning with data in 1830. The historical
discussion and empirical analysis support the proposition that legislative
initiatives with respect to bankruptcy are countercyclical in nature.
This finding complements much current literature on institutional
change, which places an emphasis on constituency interests and consensus
building in the timing of legislation.
Second, do legal changes affect the level of bankruptcy activity
in the aggregate? This question is motivated by theoretical considerations,
previous work on the impact of the 1978 Bankruptcy Reform Act, and
current creditor arguments that lenient statutes contribute to large
increases in bankruptcy filing rates. We provide a model that links
observed filing activity to the notion of a frictional bankruptcy
rate, driven by income, debt, interest rate, and inflation factors.
The null hypothesis of no legislative impact on filings cannot be
rejected for pro-creditor legislation, but is rejected for pro-debtor
initiatives, taking legislation since 1898 into account. This finding
is attributable to developments prior to 1939, however. Over the
1939-1992 period, we find little support for legislative impacts
on filings, in both the short and long run.
Ian Domowitz, Department of Economics,
Northwestern University Elie Tamer, Department of Economics, Northwestern University
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