Year: 2024
Type: article
Abstract: Under the U.S. personal bankruptcy law, exempt assets are not liquidated following bankruptcy. Entrepreneurs can undo such a protection by posting collateral. We provide a complete characterization of the interplay between asset exemption from liquidation upon default and adverse selection in a competitive credit market. Severe adverse selection induces separation, with safer entrepreneurs choosing loan contracts characterized by high collateral requirements, lower cost of credit, and credit rationing for wealth‐constraints applicants. Irrespective of adverse selection, poor safe entrepreneurs pool as they face too much rationing, otherwise. Higher exemption makes collateral more informative. Evidence from the Survey of Small Business Finances survey supports our theory.
DOI: 10.1111/jmcb.13236
Institution: University of Sassari
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
Funder: Regione Autonoma della Sardegna
OpenAlex ID: W4404394110