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In this paper the authors develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. The authors show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions.
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