Social Science History Seminar
Bankruptcy is a precise legal process designed to structure the end of relationship between a firm/person and the creditors. Bankruptcy rules relate to a second best situation, one where the debtor has not repaid the creditor. The nature of those rules has implications both for the level of credit available and willingness to borrow and for the structure of risk taking in the economy and thus for economic growth. In 1706, Parliament passed the first English bankruptcy statute to provide potential rights for bankrupts. This act represents a fundamental change in property rights between debtors and creditors. A bankrupt could now be discharged from bankruptcy prior to the repayment of all debts. Creditors, however, could choose to issue a Certificate of Discharge or to maintain the status quo that allowed the creditor to importune the bankrupt until all debts were fully repaid. This paper examines the incentives created within this law for debtor and creditor behavior and estimates the extent to which creditors were willing to provide discharge to bankrupts and thus allow for the return of entrepreneurial talent into the economy and a second chance.