Abstract
This paper examines empirically the causal effect of personal bankruptcy provisions on stock market participation. The bankruptcy insurance could induce financial risk-taking by reducing exposure to uninsurable, background risks. Exploiting the time variation in home equity protection, I find that stock ownership increases when bankruptcy protection is low. At intermediate protection levels ownership declines because unprotected assets become less attractive. The effects are restricted to wealthier households, facing relatively lower entry and participation costs. These findings highlight unintended consequences of social programs on household financial decisions.
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