Among the high-profile cases of abuse: O. J. Simpson, the pro-football player acquitted in a 1995 criminal trial of murdering his wife, moved to Florida to protect his extravagant home after losing a civil lawsuit two years later in California that required him to pay $33 million to the victims’ families.

Under pressure from creditor groups, including banks and credit card companies, Congress in 2005 passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which makes debtors jump through many more bureaucratic hoops to get relief. Signing the act, President Bush said, “In recent years, too many people have abused the bankruptcy laws. They’ve walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible.” But there is something important missing in the debate on bankruptcy: the implications of such legislation for entrepreneurial behavior.

Does bankruptcy regulation affect entrepreneurship? My own research[2]—along with that of Michelle J. White,[3] professor of economics at the University of California at San Diego—answers with an unequivocal “yes.” Studying variations in laws across the country, we find that the states that more extensively protect the assets of those filing for bankruptcy have more likely probabilities for business start-ups. Thus, the more a state forgives its debtors, the greater the entrepreneurial dynamism in that state.

Another recent study, by Thomas A. Garrett and Howard J. Wall of the Federal Reserve Bank of St. Louis, found that “the decision to become an entrepreneur is related to the homestead exemption”—or the proportion of the value of one’s house that is protected from creditors in a bankruptcy.[4] The researchers looked at the share of each state’s working-age population composed of proprietors of businesses and found that the impact of lenient bankruptcy rules had a “statistically and economically significant” effect on entrepreneurship rates.

Entrepreneurship is often a process of trial and error. No one would accuse Henry Ford of being an unsuccessful entrepreneur. But Ford started two car companies that failed before he struck gold with Ford Motor Company.

Sometimes you fail for no fault of your own. If you know that your home and personal property will be protected no matter what the outcome of your venture, you are more likely to take the risk of starting a business in the first place—and to try again if you don’t succeed. Our research found that states like Florida and Texas, with high personal bankruptcy exemptions, offer a better environment for businesses than Maryland or Virginia, with relatively low exemptions. The right to go bust is an insurance policy against financial disaster.

My work also indicates that states are less likely to see high entrepreneurship rates if their exemptions are lower than those of neighboring states. After all, entrepreneurs are free to move across state lines and take advantage of more lenient exemptions. Just as people vote with their feet by moving to states with lower taxes and better schools, entrepreneurs move to states with better bankruptcy regulations and better business conditions.

A sad irony of the 2005 legislation is that, while many countries are learning from an American system that is seen widely as the world’s most friendly to entrepreneurs, America seems not to be heeding its own lessons.

If entrepreneurs of failed businesses are denied debt discharge, they may take up safer wage and salary jobs rather than risk starting up a new venture. An unintended consequence of the legislation, therefore, may be the loss of another Henry Ford, Michael Dell, or Bill Gates. And lowering the level of asset protection provided to homes and personal property means even higher stakes for start-ups, deterring would-be entrepreneurs from risking creative destruction. My research shows a modest but unarguably negative impact from some of these changes on small-firm entry decisions.

A sad irony of the 2005 legislation is that, while many countries are learning from an American system that is seen widely as the world’s most friendly to entrepreneurs, America seems not to be heeding its own lessons.

Unlike the U.S., many countries have found the notion of debt discharge alien, and only people who are deemed “hopelessly insolvent” are allowed to file for bankruptcy protection. In most cases, bankruptcy is imposed on the hapless borrower by creditors, assets are seized, and repayment of debt can extend over several years. Until recently, German statutes held the borrower liable for a firm’s debts for nearly 30 years after filing. In Japan, business owners have been known to commit suicide rather than face the shame of a bankruptcy filing.

Do we really want to move toward systems where failure is feared and the entrepreneurial spirit takes a beating at every turn? Or do we want to tell our entrepreneurs that it’s O.K. to fail? History teaches us that entrepreneurship involves a process of learning and experimentation, and failure may well be a crucial part of that process. As a society and an economy, our best asset may be our ability to accept and forgive. So each time we tighten our bankruptcy laws in response to the O. J. Simpsons of the world, we have to wonder if we are not, inadvertently, reducing America’s dynamism.