RT Generic
T1 Insolvency institutions and efficiency
A1 García-Posada, Miguel
AB While there is a vast literature on optimal bankruptcy laws and, specifically, on the optimalallocation of control rights between debtors and creditors in corporate bankruptcy, little has beensaid about the role that alternative insolvency institutions may play in the design of the optimalinsolvency framework. This paper attempts to fill this gap by modelling two insolvency institutions-a bankruptcy system and a foreclosure system- that firms and their creditors may use when dealingwith financial distress. Firms choose between one or the other based on lenders’ willingness toprovide credit and the trade-off between two inefficiency costs, those from inefficient liquidationsand those from productive inefficiencies caused by overinvestment in capital assets. The model’skey result is that welfare is a non-monotonic function of creditor control rights in bankruptcy,implying that a perfectly “creditor-friendly” bankruptcy code (a code that always grants controlof the distressed firms to creditors) is very inefficient. A second result is that welfare is higherwhen the bankruptcy system is too “creditor-friendly” (i.e., it ensures the provision of credit, butgenerates too many inefficient liquidations) than when it is too “debtor-friendly”. Hence, if theoptimal level of creditor control rights in bankruptcy cannot be ascertained in practice, it may bebetter to grant too much control of the bankruptcy process to creditors than too little, as the lossfrom undershooting that level is larger than that from overshooting it.
YR 2015
FD 2015-06-19
LK https://hdl.handle.net/10016/21159
UL https://hdl.handle.net/10016/21159
LA eng
DS e-Archivo
RD 30 jun. 2024