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 wellinformed about bankruptcy. Many assume that bankruptcy necessarily entails the death of a business and do not know about Chapter 11 bankruptcy, where debts are renegotiated so that the business can continue operating. Small businesses are also unaware of a recent major reform that lowered the costs of bankruptcy procedures to enhance their protection. Firms also exhibit large degrees of stigma, believing that bankruptcy is embarrassing, a sign of failure, and a negative signal to employees and customers. Randomly providing short educational videos that address information or stigma gaps leads to increased firm knowledge about bankruptcy and decreases perceptions of stigma, both immediately and durably over 4 months. The videos also increase reported interest in using Chapter 11 bankruptcy and increase firms’ intended debt and investment. JEL Classifications: G33, M51