The Bankruptcy Decision in Nineteenth Century France: Cities Vs. Banks

Abstract: In sharp contrast with the Anglo-American tradition, bankruptcy in Civil law countries has always been both voluntary (initiated by the debtor) and involuntary (initiated by one or several creditors). 19th century French judicial statistics show however that the balance between the two varied substantially across regions and over time: the share of voluntary cases fell from 65% in the early 1840s to less than 40% in the 1870s. We try to identify the determinants of this trend, using panel data over 92 départements and 35 years (1838-1874), a period marked by little institutional changes. We test for the specific impact of two possible drivers of the increasing strength of creditors. One is change in the banking sector, namely the gradual shift from the early-modern model of the local merchant-cum-banker, to modern large-scale networks. A more modern or impersonal banking technology may have been instrumental in the observed evolution of the credit relationship. A second possible factor is urbanisation. A large literature (Glaeser 2008) has now explored how the many potential benefits of agglomeration, like more competitive markets or complementarity of assets. We hypothesise that cities may be also an environment where information on debtors is shared more broadly, to the ultimate benefit of creditors. Rather than being a feature of an Old Regime economic model, reputation-based credit would have thus gained a second lease of life thanks to increased urbanisation.