Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy

In an RCT with US small businesses, we document that a large share of firms are not well-informed about bankruptcy. Many assume that bankruptcy necessarily entails the death of a business and do not know about Chapter 11, where debts are renegotiated so that the business can continue operating. Firms also exhibit bankruptcy-related stigma, believing that bankruptcy is embarrassing, a sign of failure, and a negative signal to employees and customers. Short educational videos that address information or stigma increase knowledge and decrease stigma, both immediately and durably over 4 months. Videos increase reported interest in using Chapter 11 bankruptcy and increase intended debt and investment. However, we do not observe long-term real effects. A survey of bankruptcy attorneys and judges points to entrepreneurs’ overconfidence and, to a lesser extent, excessive perceived legal fees as first-order frictions explaining the limited real impact of treatments that only address information and stigma.