Research / BFI Working PaperFeb 13, 2023

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

Shai Bernstein, Emanuele Colonnelli, Mitchell Hoffman, Benjamin Iverson

In an RCT with US 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.

More Research From These Scholars

BFI Working Paper Jan 10, 2022

Revealing Corruption: Firm and Worker Level Evidence from Brazil

Emanuele Colonnelli, Spyridon Lagaras, Jacopo Ponticelli, Mounu Prem, Margarita Tsoutsoura
Topics:  Employment & Wages
BFI Working Paper Oct 26, 2022

Selfish Corporations

Emanuele Colonnelli, Niels Gormsen, Tim McQuade
Topics:  Uncategorized
BFI Working Paper Jun 21, 2022

Investing with the Government: A Field Experiment in China

Emanuele Colonnelli, Bo Li, Ernest Liu
Topics:  Financial Markets