Abstract: Motivated by the absence of personal bankruptcy law in China,this paper incorporates non-defaultable personal debt and defaultable bank debt into the capital structure choice of a firm.By constructing a dynamic stochastic general equilibrium model,we investigate the macroeconomic implications of personal bankruptcy.In the model,when deciding over debt structure,entrepreneurs must consider a tradeoff between default losses associated with bank debt and unlimited liability associated with personal debt.Personal bankruptcy attaches default losses to personal debt but at the same time alleviates the burden entrepreneurs bear because of the unlimited liability.Our counterfactual analyses show that the positive side dominates.Personal bankruptcy is helpful in expanding economic activities,reducing banking sector instability,alleviating business cycles,and improving welfare.

To elucidate the intrinsic logic behind personal bankruptcy,corporate defaults,and asset structures,we incorporate the endogenous choice between informal personal lending and formal bank lending by entrepreneurs into a Dynamic Stochastic General Equilibrium (DSGE) model within the current institutional setting of China.Additionally,we qualitatively discuss and quantitatively analyze the macroeconomic effects of the personal bankruptcy system.Specifically,we begin by employing a two-period static model that simultaneously considers informal and formal lending.This theoretical framework allows us to delve into the trade-offs faced by entrepreneurs when selecting different debt structures and understand the dual nature of the personal bankruptcy system.Subsequently,we integrate equity financing to create a comprehensive capital structure within the DSGE model.The results from stochastic simulations reveal that entrepreneurs dynamically adjust their asset structures to address productivity shocks within the system.Furthermore,in our counterfactual analysis,we introduce provisions of the personal bankruptcy system,and the quantitative findings underscore the predominant positive impact of this institutional reform.It is shown to be conducive to expanding the scale of macroeconomic activities and direct financing,reducing corporate leverage and bank loan default rates,and ultimately enhancing societal welfare.

This paper contributes significantly in several ways:Firstly,it incorporates the trade-off between bank and informal lending into corporate financing decisions,aligning more closely with real-world economic dynamics.It holds substantial policy implications for the advancement of personal bankruptcy legislation in China and guides market participants to rationally assess the economic impacts of such a system.Secondly,within the unique backdrop of China where personal bankruptcy is not allowed in informal lending,this paper pioneers the construction of a DSGE model to comprehensively analyze and quantitatively solve the macroeconomic effects of the personal bankruptcy system from perspectives such as economic growth,social financing structure,and societal welfare.Thirdly,on the policy front,our findings suggest that implementing a personal bankruptcy system can effectively alleviate the challenges of direct financing for small and medium-sized enterprises in China and should be pursued expeditiously.Additionally,complementary measures,including enhanced regulatory frameworks,should be implemented to mitigate potential risks like “pseudo-bankruptcies” and increased non-performing assets.

The paper is structured as follows:
In the first section,we introduce the background of personal bankruptcy law,explain the theoretical trade off of this policy and conduct literature review.In the second section,we construct two static models based on the trade-off between bank and informal lending and theoretically analyze the logical relationship between corporate debt structure and bankruptcy mechanisms,along with the potential economic effects of personal bankruptcy systems.In the third section,we build,solve,and simulate a DSGE model that incorporates endogenous choices between bank and informal lending,quantitatively analyzing entrepreneurs' trade-offs in response to productivity shocks.In the fourth section,we introduce the personal bankruptcy system in a counterfactual model and conduct numerical analyses,examining the impact and mechanisms of different degrees of personal bankruptcy systems on the macroeconomy.Finally,in the fifth section,we summarize the entire paper and present policy recommendations.