The Evolution of Bankruptcies in 19th Century France

Abstract: Bankruptcy procedures are one of the mechanisms that were designed during the medieval age to support contractual exchange. Those types of procedure are mainly thought in the literature either as an instrument for settling defaults and bargaining ex post on residual rights or as a way to foster market discipline by giving agents the ex ante signals and appropriate incentives not to cheat their creditors. In this paper, we use new time series data on the bankruptcy figures in 19th century France that provide the evolution of the number of cases, the accumulated backlog, the outcomes, the value of assets and liabilities, the dividend earned by creditors. This allow us to characterize the main evolution of this legal institution in a developing economy. We find clear evidences of a sustained, long-term process of legalization, whereby the settlement of private defaults became increasingly ruled by courts. Also the increase in the number of procedures was driven partly by the expanding reach of the institution towards the lower strata of economic activity, i.e. small and very small businesses. This was done through the introduction of a kind of fresh start process through which some entrepreneurs were discharged de facto of their obligations towards creditors. Finally and consistently with traditional view the bankruptcy procedure did also manage the reallocation of property right following (sufficiently big) firms’ insolvencies.