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Fast Bargaining in Bankruptcy

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  • David Benjamin

Abstract

I combine two previously separate strands of the bargaining literature to present a bargaining model with both one-sided private information and a majority vote for proposals to go into effect. I use this model to show that the US bankruptcy code produces shorter delays and higher welfare than the UK law. I consider the bargaining that occurs in bankruptcy between an informed firm and a set of uninformed creditors over a set of new debt contracts. The agents have an infinite horizon to bargain and cannot commit to a schedule of future offers. If individual creditors can be treated differently and a majority vote is required for the acceptance of new debt contracts, adding creditors increases the probability of reaching agreement by the end of any given period. The US regime has these features. I give numerical examples which show the efficiency gains from increasing the number of creditors are significant. The UK voting rule allows one creditor a veto of all plans. Replacing the majority voting rule with the UK voting rule and allowing only the creditor with the veto to suggest plans, I show that the UK regime has longer delays and is less efficient than the US regime as long as the US regime has multiple creditors

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 664.

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Date of creation: 2004
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Handle: RePEc:red:sed004:664

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Keywords: Bargaining; Bankruptcy; Majority Voting;

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  1. Hülya K. K. Eraslan, 2008. "Corporate Bankruptcy Reorganizations: Estimates From A Bargaining Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 659-681, 05.
  2. Lucian Arye Bebchuk & Howard F. Chang, 1991. "Bargaining and the Division of Value in Corporate Reorganization," NBER Technical Working Papers 0097, National Bureau of Economic Research, Inc.
  3. Hart, O. & Moore, J., 1991. "A Theory of Debt Based on the Inalienability of Human Capital," Working papers 592, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Julian R Franks & Kjell G Nyborg, 1994. "Control Rights, Debt Structure, and the Loss of Private Benefits: The Case of the UK Insolvency Code," CEPR Financial Markets Paper 0047, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  5. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
  6. Allan C. Eberhart & Edward I. Altman & Reena Aggarwal, 1999. "The Equity Performance of Firms Emerging from Bankruptcy," Journal of Finance, American Finance Association, vol. 54(5), pages 1855-1868, October.
  7. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
  8. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  9. Drew Fudenberg & David K. Levine & Jean Tirole, 1985. "Infinite-Horizon Models of Bargaining with One-Sided Incomplete Information," Levine's Working Paper Archive 1098, David K. Levine.
  10. Antonio Merlo & Charles Wilson, 1997. "Efficient delays in a stochastic model of bargaining," Economic Theory, Springer, vol. 11(1), pages 39-55.
  11. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  12. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
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