Publication Date:
2016
Short description:
Asset Exemption in Entrepreneurs' Bankruptcy and the Informative Role of Collateral / Deidda, Luca; Atzeni, Gianfranco; Arca, Pasqualina. - 13/16:(2016), pp. 1-59. [10.2139/ssrn.3472035]
abstract:
If an entrepreneur files for bankruptcy under Chapter 7, (i) most of her debt is discharged,
and (ii) only her non-exempt assets are liquidated. Entrepreneurs can undo this “insurance” by
posting collateral. The opportunity cost of doing so is lower for safer entrepreneurs who face a
lower probability of default. Accordingly, we show that under adverse selection, as exemption
increases, collateral becomes a more e↵ective sorting device. As a result, an entrepreneur’s
decision to post collateral improves access to credit and reduces the cost of credit to a greater
extent the larger the exemption is. Econometric tests using data from the US Survey of Small
Business support our theory.
and (ii) only her non-exempt assets are liquidated. Entrepreneurs can undo this “insurance” by
posting collateral. The opportunity cost of doing so is lower for safer entrepreneurs who face a
lower probability of default. Accordingly, we show that under adverse selection, as exemption
increases, collateral becomes a more e↵ective sorting device. As a result, an entrepreneur’s
decision to post collateral improves access to credit and reduces the cost of credit to a greater
extent the larger the exemption is. Econometric tests using data from the US Survey of Small
Business support our theory.
Iris type:
2.1 Contributo in volume (Capitolo o Saggio)
Keywords:
Screening, Separation, Pooling, Exemption, Collateral, Credit rationing, Cost of credit
List of contributors:
Deidda, Luca; Atzeni, Gianfranco; Arca, Pasqualina
Book title:
Contributi di ricerca CRENOS