Wealth Policy Research Articles

Avoiding material hardship: The buffer function of wealth

We assess how a variety of disruptive life-course events impact the economic wellbeing of US households and trace the importance of household wealth in helping families who experience these events avoid entering a spell of material hardship. Using longitudinal data from two panels of the Survey of Income and Program Participation (SIPP), we draw on direct measures of material hardship, disruptive events and household assets. Our analyses reveal that the relationship between disruptive events and the likelihood of experiencing a new spell of material hardship strongly varies across the wealth distribution, suggesting that high household wealth provides an effective private safety net. By distinguishing different types of disruptive events, we demonstrate that divorce, disability and income loss entail a risk of material hardship but also that this risk is effectively buffered by substantial wealth. Different types of hardship – namely, financial, food and medical hardship – respond in similar ways. Like public insurance schemes, wealth insurance helps buffer the effects of disruptive events on material hardship, but unlike public insurance schemes, reliance on private wealth further stratifies the economic wellbeing of households. Policy options for addressing this highly stratified private insurance scheme include disposing of the need for it by funding more robust public insurance, for instance through wealth taxation.

Tenancy by the Entirety and the Value of Wealth Insurance for Entrepreneurs

This paper explores the willingness of entrepreneurs to pay for wealth insurance to protect personal assets in case of business failure and the impact of this strategy on small business operation decisions. I show that antidiscrimination laws allow married firm owners in half of U.S. states to choose between asset protection and having more collateral for business funding, allowing entrepreneurs to reveal their valuation for preserving personal assets at time of failure. I find that firm owners value asset protection offered by tenancy by the entirety laws at $900-$1000 per year. Firms receive smaller loans when entrepreneurs use this form of ownership to reduce the personal costs of firm failure, but show no differences in hiring patterns or spending on risky projects. This strategy of preparation in case of failure appears to affect small businesses through the funding channel.

How Does Personal Bankruptcy Law Affect Startups?

We analyze the effect of changes in U.S. state personal exemptions on the financing structure and performance of a representative sample of start-ups. An increase in the amount of borrower’s personal wealth protected in bankruptcy reduces the availability of bank credit to all start-ups. Owners of unlimited liability businesses, who benefit from the increase in wealth insurance, offset the reduction in bank credit by investing more money in the firm. We find no such response for start-ups whose entrepreneurs’ personal wealth is already protected by limited liability. Consequently, corporations experience lower growth rates and higher failure rates, while proprietorships performance is not negatively affected.

Debtor Protection and Small Business Credit

In this paper I ask whether and how debtor protection affects aggregate small business credit quantity. Using comprehensive data on the number and amount of small business loans granted by commercial banks, and employing a robust difference-in-difference empirical design utilizing staggered shocks to personal bankruptcy exemptions, I find that increases in debtor protection increase the equilibrium quantity of small business credit in local regions. This finding is statistically significant and robust, despite competing demand and supply effects. I find that an average change in the homestead exemption results in a 1.1% increase in the number of small business loans in a local area (census tract), and a 2.5% increase in the total volume. The increase in quantity is concentrated in areas with presumably higher risk aversion and higher wealth, as predicted by the wealth insurance and collateral channels, respectively, and where local banks are better able to determine borrower type. These findings add depth to previous literature on debtor protection and small business financing that finds a tightening of credit terms, and suggest a greater role of the wealth insurance properties of personal bankruptcy law in determining aggregate small business credit quantity.

IMPLEMENTASI LEBIJAKAN PEKERJA ANAK MENURUT KONVENSI ILO

This paper is a review of children labour. Theory on children development and empirical experience are provided to discuss the topic. Children labour has received seriuous attention from ILO. The fact that children labor increase from year to year is the world issues. Mostly, labor children are available in the informal sectors where the salary is low, health and wealth insurance is trivial, and dangereous jobs are done. Ecocomic crisis that has impact on various social conflicts runs along the recent years and people try to obtain solutions to cope with the problems. Protection to save the children from the damage of generation has been done.

How Does Bankruptcy Law Impact the Elderly’s Business and Housing Decisions?

AbstractThe elderly are the population most likely to file for bankruptcy, with filings increasing by 150 percent from 1991 to 2007. This is likely because they live with relatively flat incomes and high medical expenses, and their retirement and housing assets are typically exempt from bankruptcy filings. In addition, nine states adopted higher asset exemptions specifically for the elderly. Using the Health and Retirement Study and recent state-by-time variation in homestead exemptions, we are the first to test whether the benefits of partial wealth insurance or the cost of supply-side credit constraints are predominant for the elderly. Using pooled cross-sectional analysis, we find that an increase in a state’s homestead exemption increases the elderly’s home equity and business ownership; however, the credit constraint is dominant in unlimited-exemption states, which decreases home and business ownership. Panel analysis reveals that an increase in the homestead exemption positively affects home ownersh...

The US bankruptcy law and private equity financing: empirical evidence

The generous personal bankruptcy law in the United States is important to entrepreneurs because failed entrepreneurs can resort to this system to shelter part of their wealth against negative consequences of business failure. Fan and White (Journal of Law and Economics XLVI:543–567, 2003) documented that high bankruptcy exemptions provide incentives for entrepreneurs to start/own new businesses. The partial wealth insurance effect provided by the bankruptcy exemptions also has a significant and negative impact on the entrepreneurs’ access to bank credits (Berkowitz and White, The Rand Journal of Economics 35(1):69–84, 2004; Gropp Scholz and White, The Quarterly Journal of Economics 112(1):217-251, 1997). In this article, we investigate whether and to what extent the US bankruptcy law has any effect on venture capital (VC) investment. Making use of company level information, we document that the amount of venture financing received is negatively related to the bankruptcy exemption levels, and the number of rounds of financing as well as the number of VC funds involved is negatively associated with bankruptcy exemptions. Further, we report consistent evidences based on state level data with regard to the effects of the US personal bankruptcy law.

THE EFFECT OF UNEMPLOYMENT BENEFITS, WELFARE BENEFITS, AND OTHER INCOME ON PERSONAL BANKRUPTCY

Personal bankruptcy, unemployment insurance, and Aid to Families with Dependent Children provide income and wealth insurance. Because they have similar purposes, it should not be surprising that some households use more than one of these programs or that the programs are substitutes. This study contributes to the personal bankruptcy literature by examining this interaction and finds that increases in unemployment benefits decrease the probability of bankruptcy. (JEL D12, K35)

Personal Bankruptcy and the Level of Entrepreneurial Activity

The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of noncorporate firms are personal liabilities of the firms’ owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner’s personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore that the probability of owning a business increases as the exemption level increases. We test this prediction and find that the probability of households owning businesses is 35 percent higher if they live in states with unlimited rather than low exemptions.

Personal Bankruptcy and the Level of Entrepreneurial Activity

The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as for consumers. When firms are non-corporate, debts of the firm are personal liabilities of the entrepreneur/owner. If the firm fails, the entrepreneur has an incentive to file for bankruptcy under Chapter 7, since both business debts and the entrepreneur's personal debts will be discharged. The entrepreneur must give up assets above a fixed bankruptcy exemption level for repayment to creditors, but future earnings are entirely exempt. Exemption levels are set by the states and they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs by providing partial wealth insurance. This means that the predicted relationship between the probability of owning a business and the exemption level is positive at low exemption levels, but may be either positive or negative at high exemption levels, depending on whether higher bankruptcy costs outweigh the gain from additional insurance. We test this prediction and find evidence that the probability of owning a business is about 28% higher if potential entrepreneurs live in states with unlimited exemptions rather than low exemptions. We also find evidence that families are significantly more likely to start businesses if they live in states with high or unlimited, rather than low, bankruptcy exemptions. They are also more likely to organize their businesses as non-corporate rather than corporate if they live in states with high exemptions.

An Optimal Personal Bankruptcy Procedure and Proposed Reforms

Abstract We investigate a new approach to the reform of U.S. personal bankruptcy law in which Chapters 7 and 13 would be combined. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obligation to repay in bankruptcy on debtors' ability to pay from both sources. An important function of personal bankruptcy is to provide partial wealth insurance for risk‐averse debtors by discharging some debt when debtors' ability to repay turns out to be low. However, the current bankruptcy system encourages debtors to file for bankruptcy even when their ability to repay is high. The proposed reform maintains the insurance function of bankruptcy but reduces debtors' incentive to take advantage of the system. Using simulation techniques, we investigate the properties of a bankruptcy reform in which both the wealth exemption and the postbankruptcy earnings exemption are optimized. We show that the proposed reform improves efficie...

An Optimal Personal Bankruptcy Procedure and Proposed Reforms

We investigate a proposed reform of U.S. personal bankruptcy law which combines Chapters 7 and 13. The proposed reform obliges debtors in bankruptcy to use part of both their wealth and their future earnings to repay debt and therefore bases the obligation to repay in bankruptcy on debtors' ability-to-pay. An important function of personal bankruptcy is to provide partial wealth insurance for risk averse debtors by discharging some debt when debtors' ability to repay turns out to be low. However the current bankruptcy system encourages debtors to file for bankruptcy even when their ability to repay is high. The proposed reform maintains the insurance function of bankruptcy, but reduces debtors' incentive to take advantage of the system. Using simulation techniques, we show that the reform improves efficiency relative to the current system.