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  • 2023
  • Working Paper

Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy

By: Shai Benjamin Bernstein, Emanuele Colonnelli, Mitchell Hoffman and Benjamin Iverson
  • Format:Print
  • | Language:English
  • | Pages:55
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Abstract

In a randomized control trial (RCT) with U.S. small businesses, we document that a large share of firms are not well-informed about bankruptcy. Many assume that bankruptcy necessarily entails the death of a business and do not know about Chapter 11 bankruptcy, where debts are renegotiated so that the business can continue operating. Small businesses are also unaware of a recent major reform that lowered the costs of bankruptcy procedures to enhance their protection. In addition, they exhibit substantial stigma related to bankruptcy, believing that bankruptcy is embarrassing, a sign of failure, and a negative signal to employees and customers. Randomly providing short educational videos that address information or stigma gaps leads to increased firm knowledge about bankruptcy and decreased perceptions of stigma, both immediately and durably over 4 months. The videos also increase reported interest in using Chapter 11 bankruptcy and increase firms’ intended debt and investment. However, we do not find long-term evidence of real effects. We then conduct a survey of bankruptcy attorneys and judges, who point to entrepreneurs’ overconfidence and, to a lesser extent, excessive perceived legal fees as first-order frictions explaining the limited real impact of treatments that only address information and stigma. Our findings help inform the design of policies targeting the limited use of bankruptcy protection by small businesses.

Keywords

Small Business; Insolvency and Bankruptcy; Knowledge Dissemination; Outcome or Result

Citation

Bernstein, Shai Benjamin, Emanuele Colonnelli, Mitchell Hoffman, and Benjamin Iverson. "Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy." NBER Working Paper Series, No. 30933, February 2023.
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About The Author

Shai Benjamin Bernstein

Entrepreneurial Management
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More from the Authors
  • Why Decentralized Crypto Platforms Are Weathering the Crash By: Shai Bernstein and Scott Duke Kominers
  • Ribbit Capital and the Gauntlet Investment Opportunity By: Shai Bernstein and Allison M. Ciechanover
  • The Contribution of High-Skilled Immigrants to Innovation in the United States By: Shai Bernstein, Rebecca Diamond, Abhisit Jiranaphawiboon, Timothy McQuade and Beatriz Pousada
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