NCPA - National Center for Policy Analysis

Big Exemptions Makes Big Entrepreneurs

November 12, 2003

Exemption levels, which determine the amount of assets a person declaring bankruptcy may retain, are the only aspect of U.S. bankruptcy law that varies from state to state. The exemption level provides entrepreneurs with partial wealth insurance, since they can keep wealth up to the exemption level in their state if their businesses fail.

A study from the National Bureau of Economic Research examines how variations in exemption levels affect incentives to launch, to own and to end small businesses. The results show:

  • Home-owning families are 35 percent more likely to own businesses if they live in states with high or unlimited homestead exemptions rather than low homestead exemptions.
  • Families who rent are 29 percent more likely to own businesses if they live in high exemption states.
  • Bankruptcy exemptions affect the decision to start a business: home-owning families are 28 percent more likely to start businesses if they live in states with unlimited rather than low homestead exemptions.
  • Surprisingly, the authors find no significant relationship between exemption levels and whether families end their businesses.

The authors warn that the new personal bankruptcy law currently under review in Congress may damage small businesses. By making bankruptcy more restrictive, Congress may reduce the attractiveness of going into business and scare away lenders to once-failed entrepreneurs.

Source: Matt Nesvisky, "Personal Bankruptcy Rules Change Entrepreneurial Activity," NBER Digest, July 2003; based upon Wei Fan and Michelle J. White, "Personal Bankruptcy and the Level of Entrepreneurial Activity," National Bureau of Economic Research, Working Paper No. 9340, November 2002.

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