Summary:
Personal bankruptcy is a fundamental debt resolution mechanism in modern market economies. Its core purpose is to provide “honest but unfortunate” debtors with an opportunity for debt discharge and a fresh start, thereby striking a balance between protecting creditors' rights and preserving overall economic efficiency. Although China's corporate bankruptcy framework has been progressively strengthened, a formal mechanism for individual insolvency has long been absent. This institutional gap is particularly salient in a context where private entrepreneurs commonly bear personal joint-liability guarantees for corporate borrowing, effectively piercing limited liability and substantially magnifying the personal debt risks associated with entrepreneurial failure. Against this backdrop, the introduction of personal bankruptcy reform represents a critical step toward improving the market exit mechanism and fostering a rule-based business environment. Since 2019, the Supreme People's Court has guided pilot reforms in multiple regions, creating a quasi-natural experimental setting for evaluating the economic consequences of establishing a personal bankruptcy system in China. Building on this institutional context, this paper systematically examines the impact of personal bankruptcy reform on regional entrepreneurial activity and explores its underlying mechanisms. Specifically, we construct a staggered difference-in-differences design using county-month panel data on business registrations from 2015 to 2023, combined with detailed information on the timing and location of personal bankruptcy pilot implementation. The results show that following the reform, pilot regions experienced a significant increase in new firm entry: our baseline estimates indicate that the number of newly registered market entities rose by approximately 8.39 percent. These findings remain robust to a range of tests, including parallel trend validation, spillover analysis, alternative outcome measures, and controls for concurrent policy shocks. To uncover the mechanisms, we focus on two primary channels: risk mitigation and credit market effects. Through the risk channel, personal bankruptcy limits the upper bound of debt liability in the event of business failure, thereby reducing the downside risks of entrepreneurship. Empirical evidence shows that the reform has a stronger effect on market entities subject to unlimited liability and on private firms. Moreover, women, individuals with higher risk aversion, and those with higher levels of education and occupational status are more likely to engage in entrepreneurship after the reform. The positive effect is also more pronounced in environments characterized by heightened policy uncertainty, economic downturns, or elevated climate risks. These findings suggest that personal bankruptcy effectively lowers the cost of failure and alleviates risk concerns among potential entrepreneurs. Through the credit channel, conventional theory predicts that debt discharge may exacerbate moral hazard and tighten credit supply. However, using enforcement case records, P2P lending platform data, and court-level private lending dispute data, we find that the reform does not increase strategic default. Instead, it significantly reduces the number of dishonest judgment debtors and cases involving enforcement obstruction, indicating that the combined framework of debt discharge for honest debtors and sanctions for dishonest ones reshapes repayment incentives. At the same time, loan sizes increase and borrowing costs decline in pilot regions, suggesting an improvement in credit supply conditions. These results imply that, under appropriate institutional constraints, debtor protection does not necessarily undermine creditor rights; rather, by strengthening repayment incentives, it can improve credit market expectations. We further examine entrepreneurial quality. While short-term survival rates of newly established firms decline after the reform, long-term survival rates increase significantly. In addition, the share of innovative firms and firms operating in strategic emerging industries rises in pilot regions. This pattern suggests that although lowering the cost of entry may initially increase market experimentation, the reform ultimately facilitates the emergence and selection of higher-quality entrepreneurial activity. Overall, our evidence from China's personal bankruptcy pilot reforms indicates that debt discharge arrangements can achieve a balance between risk protection and incentive discipline, thereby exerting a positive effect on entrepreneurial activity. Under a well-designed institutional framework, debtor protection does not necessarily weaken credit constraints; instead, by reshaping the expectations and behavior of both debtors and creditors, it can improve financing conditions and provide an institutional foundation for entrepreneurship. These findings contribute to the broader literature on debtor protection and credit markets and offer important policy implications for the development of a more stable and incentive-compatible market exit system.
丁海, 刘晨冉, 周黎安. 个人破产制度与地区创业活力——基于中国个人破产试点的经验证据[J]. 金融研究, 2026, 550(4): 130-148.
DING Hai, LIU Chenran, ZHOU Li-an. Personal Bankruptcy and Regional Entrepreneurial Activity: Evidence from Personal Bankruptcy Reforms in China. Journal of Financial Research, 2026, 550(4): 130-148.
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