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Protection for Whom? Creditor Conflict and Bankruptcy

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  • Stanley D. Longhofer
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    Abstract

    In the absence of a bankruptcy law, private debt collection remedies generally result in an ad hoc disposal of the debtor's assets, which reduces the aggregate value of creditors' claims. We show that creditors will often choose not to write private contracts that would prevent this inefficient behavior, even though these contracts would be to the mutual benefit of all creditors. Our analysis therefore provides an economic rationale for the existence of a bankruptcy law that makes a collective resolution compulsory for all creditors. We argue that such a mandate is a requisite part of any effective bankruptcy system, including proposals for market-based resolutions of insolvency. Copyright 2004, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal American Law and Economics Review.

    Volume (Year): 6 (2004)
    Issue (Month): 2 ()
    Pages: 249-284

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    Handle: RePEc:oup:amlawe:v:6:y:2004:i:2:p:249-284

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    Cited by:
    1. Bertazzi, Ilaria, 2014. "A challenge to normativity and economic theory, the case ofdebtors movements," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201405, University of Turin.
    2. Régis Blazy & Laurent Weill, 2007. "The impact of legal sanctions on moral hazard when debt contracts are renegotiable?," DULBEA Working Papers 07-06.RS, ULB -- Universite Libre de Bruxelles.
    3. Blazy, Régis & Deffains, Bruno & Umbhauer, Gisèle & Weill, Laurent, 2013. "Severe or gentle bankruptcy law: Which impact on investing and financing decisions?," Economic Modelling, Elsevier, vol. 34(C), pages 129-144.
    4. Iacoviello, Matteo & Minetti, Raoul, 2006. "International business cycles with domestic and foreign lenders," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2267-2282, November.
    5. Blazy, Régis & Chopard, Bertrand & Nigam, Nirjhar, 2013. "Building legal indexes to explain recovery rates: An analysis of the French and English bankruptcy codes," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1936-1959.
    6. Régis Blazy & Laurent Weill, 2006. "The Impact of Legal Sanctions on Moral Hazard when Debt Contracts are Renegotiable," LSF Research Working Paper Series 06-09, Luxembourg School of Finance, University of Luxembourg.

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