Limitations, Policy Implications and Future Research

The models presented in Chapter 2 are simple models to represent the main aspects of the bankruptcy decision. As it is the case for all models, these models have some limitations and do not capture all relevant aspects of the consumer bankruptcy such as the role of social stigma, information, access to credit after bankruptcy, entrepreneurial activities and work incentives. However, data limitations prevent to analyse all these related aspects. Even

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though Chapter 3 and 4 addresses some of these issues, some of them still need to be addressed. For further studies, it is possible to modify the models to address some of these topics in a reduced form by including parameters for access to credit markets in the future, or utility penalties in case of bankruptcy, but it is unclear whether such additions would yield tractable models.

The findings of Chapter 2 may help to weigh the trade-off between the strategic behaviour and the adverse events theories. A fair consumer bankruptcy system is necessary to smooth the consumption after adverse events to protect ‘honest but unfortunate’ individuals but should deter the strategically oriented individuals at the same time because otherwise it may harm the credit markets and cause interest rates to increase.

Access to credit is generally considered as a financial necessity, and the inability of individuals to access the credit may harm the economic activity. Even though data limitations prevent to analyse all aspects of the relationship between the consumer bankruptcy and the financial exclusion, Chapter 3 contributes to the literature to better understand this relationship.

The study acknowledges the limitations of the assumptions which relies on the selection on observables and PSM only corrects the selection bias among included observable characteristics. While this study controls for a set of covariates to explain the access to consumer credit, it cannot completely rule out the existence of unobservable characteristics.

Therefore, the reasons behind limited access to consumer credit for entrepreneurs are unclear and beyond the scope of Chapter 4. However, being aware of the link between access to credit and the entrepreneurial activity, policy makers should seek to develop policies accordingly.

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One explanation for this exclusion may be the default risk of entrepreneurs. With the 2002 consumer bankruptcy reform, the bankruptcy law was made more pro-debtor. The main rationale was to encourage the entrepreneurial activity. Even though a pro-debtor bankruptcy law encourages the entrepreneurial activity, it may also tighten credit availability to individual entrepreneurs due to the increasing risk of default. Because, when a firm is unincorporated, its debts are personal liabilities of the firm’s owner. If the firm fails, the owner has an incentive to file for consumer bankruptcy. The findings of this research may help to weigh the trade-off between the entrepreneurship and the credit availability.

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