A Spatial Model of the Impact of 

State Bankruptcy Exemptions on Entrepreneurship

by Aparna Mathur, Ph. D

Department of Economics, University of Maryland, College Park 

2004. [54] pages, under contract no. SBAHQ-03-M-0533

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and 

analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily reflect the views of the Office of Advocacy.

Purpose

The Office of Advocacy tracks the market conditions 

in which small businesses operate, which includes 

the regulatory policies, business formation practices 

and market entry approach. The focus of this paper is 

on the U.S. personal bankruptcy law, and in particular, the effect that state bankruptcy exemptions have 

on entrepreneurship. 

The homestead exemption is an exemption for 

equity in owner-occupied housing. This varies 

widely among the states, with some states having no 

exemption and others having unlimited exemptions. 

Most states also have exemptions for household 

belongings, equity in vehicles, retirement accounts, 

and a wildcard category that can be applied to any 

type of asset. These exemption levels have changed 

over time in many states. 

Given these differences in state bankruptcy 

exemptions, businesses might opt for a business location based on the conditions in surrounding states. 

In an effort to better understand the effect of such 

state exemptions on entrepreneurship, the Office of 

Advocacy contracted with Aparna Mathur, a graduate 

student at the University of Maryland, for this study. 

Overall Findings

Entrepreneurs choose the location of their businesses 

in response to competing business conditions in and 

outside the state, making state bankruptcy laws a 

significant determinant of entry and exit decisions by 

small firms.

Highlights

• The bankruptcy exemption in one’s own state 

has a significant and positive impact on entrepreneurship. The paper finds that higher bankruptcy 

exemptions in neighboring states lower the probability of starting a business in the state of residence.

• Lower taxes in neighboring states increase the 

probability of business closure, as entrepreneurs may 

decide to relocate to these states to take advantage of 

better conditions.

• According to the findings, state unionization rates 

significantly reduced the probability of business closures.

• The study discovered that states with SelfEmployment Assistance (SEA) programs for people 

receiving unemployment benefits encourage transitions to entrepreneurship, and businesses in these 

states are less likely to shut down. This voluntary 

program currently exists in seven states.

• Individuals with employer-provided health insurance are less likely to leave their existing jobs to start 

a business. In contrast, those with self-purchased 

insurance are more likely to become self-employed. 

• Individuals who owned a business in the past are 

40 percent more likely to start a business, while individuals who did not own a business before are more 

likely to end a business. 

Scope and Methodology

This two-part study uses longitudinal data from the 

Survey of Income and Program Participation (SIPP) 

dataset. SIPP is a multi-panel longitudinal survey that 

measures economic and demographic characteristics 

over roughly a three-year period. The related panel 

data used for this study are: 1993-1995 and 1996-1998. 

The first part focuses on job creation through the birth 

of small businesses, and the second focuses on job 

destruction through the death of small businesses.

The report examines the the influence of statebankruptcy exemptions and other business and macroeconomic variables in the resident and neighboring 

states on entrepreneurs' decisions to begin or end a 

July 2005 No. 261
business in their own state.

There are some limitations to the data—some 

questions relevant for the study are not asked across 

different panels. For instance, the survey lacks information on whether the spouse of the business owner 

had health insurance.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2005-105509

Pricing information:

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 Microfiche, A01 ($14.00)

 CD-ROM, A00 ($18.95)

 Download, A00 ($ 8.95)

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