The Contagion between Corporate and Personal Bankruptcy

The relationship between personal and firm bankruptcy is intuitively understood but has not been previously studied. When a person files a bankruptcy petition they reduce their spending on goods and services sold by companies. Similarly, when a firm files for bankruptcy some employees lose their jobs and incomes. The interaction between personal and business bankruptcy filings is important especially if it heightens the decline suffered during a major economic downturn. We document a strong positive relationship between personal and corporate bankruptcies by examining the issue across the states and over time. In our 2SLS regression we control for GDP, change in population, state industry concentration and other aggregate level financial state variables. Our estimates suggest that a 10% increase in personal bankruptcies results in a 7.33% increase in business bankruptcies and that a 10% increase in business bankruptcies results in a 3.43% increase in the personal bankruptcy rate.