ECONOMICS SEMINAR SERIES (ESS) - 2024/2025

Speaker: Claudia Steinwender (LMU - Munich)

Title: Broke, but not out of luck: Bankruptcy regulation and economic activity (joint with Tao Chen, Sun Kyoung Lee and Marta Santamaria)

Abstract
Failure is an inherent part of economic activity. This paper examines the role of institutions that regulate economic failure—specifically, bankruptcy laws—in 19th-century United States. The effects of bankruptcy laws were widely debated, as they provide insurance against adverse economic conditions while potentially inducing moral hazard. We exploit the repeated enactment and repeal of federal bankruptcy laws, combined with novel, high-resolution drought data from tree-ring chronologies, to analyze how these laws shaped farmers' responses to drought-induced harvest losses using data from the U.S. Agricultural Census. Our findings show that in periods without a bankruptcy law, droughts led to the fragmentation of large farms, increasing the number of smaller farms, many of which were rented or mortgaged. In contrast, when bankruptcy laws were in place, farm owners were more likely to exit agriculture. We then extend our analysis to agricultural innovation using a staggered event study design, which allows us to estimate how bankruptcy laws affect the impact of droughts on agricultural patenting.