AbstractChapter 11 structures complex negotiations between creditors and debtors that are overseen by a bankruptcy court. This paper identifies conditions under which it is optimal for the court to sometimes err in determining whether a firm should be liquidated. Such errors can affect the optimal action choices by both good and bad entrepreneurs. We first characterize the optimal error rate without renegotiation, providing conditions under which it is optimal for the court both to sometimes mistakenly liquidate "good firms," but not "bad firms." When creditors and debtors can renegotiate to circumvent an error-riven court and creditors have all of the bargaining power, we show that for a broad class of action choices, a blind court--one that ignores all information and hence is equally likely to liquidate a good firm as a bad one--is optimal.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0304.
Date of creation: 2003
Date of revision:
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grossman, Gene M & Katz, Michael L, 1983. "Plea Bargaining and Social Welfare," American Economic Review, American Economic Association, vol. 73(4), pages 749-57, September.
- Fishman, Michael J & Hagerty, Kathleen M, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 427-44, May.
- Spier, Kathryn E, 1994. "Settlement Bargaining and the Design of Damage Awards," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(1), pages 84-95, April.
- Shin Hyun Song, 1994. "The Burden of Proof in a Game of Persuasion," Journal of Economic Theory, Elsevier, vol. 64(1), pages 253-264, October.
- Dominique Demougin & Claude Fluet, 2008.
"Rules of proof, courts, and incentives,"
RAND Journal of Economics,
RAND Corporation, vol. 39(1), pages 20-40.
- Hind Sami, 2009.
"Random monitoring in financing relationships,"
- Nicola Gennaioli & Stefano Rossi, 2010.
"Judicial Discretion in Corporate Bankruptcy,"
Review of Financial Studies,
Society for Financial Studies, vol. 23(11), pages 4078-4114, November.
- Ronel Elul & Piero Gottardi, 2011.
"Bankruptcy: is it enough to forgive or must we also forget?,"
11-14, Federal Reserve Bank of Philadelphia.
- Ronel Elul & Piero Gottardi, 2007. "Bankruptcy: Is it enough to forgive or must we also forget?," Working Papers 07-10, Federal Reserve Bank of Philadelphia.
- Ronel Elul & Piero Gottardi, 2008. "Bankruptcy: Is It Enough to Forgive or Must We Also Forget?," Economics Working Papers ECO2008/41, European University Institute.
- Piero Gottardi & Ronel Elul, 2007. "Bankruptcy: Is It Enough to Forgive or Must we Also Forget?," Working Papers 2007_23, Department of Economics, University of Venice "Ca' Foscari".
- Ronel Elul & Piero Gottardi, 2008. "Bankruptcy: Is it enough to Forgive or must we also Forget?," CESifo Working Paper Series 2313, CESifo Group Munich.
- Franks, Julian R & Lóránth, Gyöngyi, 2005. "A Study of Inefficient Going Concerns in Bankruptcy," CEPR Discussion Papers 5035, C.E.P.R. Discussion Papers.
- Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lee Faulhaber).
If references are entirely missing, you can add them using this form.