Personal bankruptcy law and self-employment activity

Microeconomic theory suggests that risk aversion may result in people to take less optimal decision in a situation associated with risk. If people believe that being self-employed is riskier than beingwage-employed, then at some point, risk averse wage-employed won’t become self-employed even if it is optimal to do so. In this case, introducing some sort of insurance scheme may increasepeople’s participation in self-employment activity. I use the family level data from Panel Study of Income Dynamics, and I exploit provisions in the United States’ bankruptcy code, specifically thehomestead exemption level, as the insurance institution. I find that the increase of exemption level by ten percentage point increases the probability of owning a business by 1.5 percentage points,after the year 2005. I also find that the effect is explained by the incorporated business.