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Near-sighted Justice

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  • DAN BERNHARDT
  • ED NOSAL

Abstract

Chapter 11 structures complex negotiations between creditors and debtors that are overseen by a bankruptcy court. We identify conditions where the court should sometimes err in determining which firms should be liquidated. Such errors affect actions by both good and bad entrepreneurs. We first characterize the optimal error rate without renegotiation. When creditors and debtors can renegotiate to circumvent an error-riven court, for one class of actions a "blind" court that ignores all information is optimal. For another class, the court should place the burden of proof on the entrepreneur. The robust feature is that the court should sometimes err. Copyright 2004 by The American Finance Association.

Suggested Citation

  • Dan Bernhardt & Ed Nosal, 2004. "Near-sighted Justice," Journal of Finance, American Finance Association, vol. 59(6), pages 2655-2684, December.
  • Handle: RePEc:bla:jfinan:v:59:y:2004:i:6:p:2655-2684
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Grossman, Gene M & Katz, Michael L, 1983. "Plea Bargaining and Social Welfare," American Economic Review, American Economic Association, vol. 73(4), pages 749-757, September.
    4. Michael J. Fishman & Kathleen M. Hagerty, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 427-444.
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    Cited by:

    1. Dominique Demougin & Claude Fluet, 2008. "Rules of proof, courts, and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 20-40.
    2. Ronel Elul & Piero Gottardi, 2015. "Bankruptcy: Is It Enough to Forgive or Must We Also Forget?," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 294-338, November.
    3. repec:spr:busres:v:10:y:2017:i:2:d:10.1007_s40685-017-0047-x is not listed on IDEAS
    4. Franks, Julian R & Lóránth, Gyöngyi, 2005. "A Study of Inefficient Going Concerns in Bankruptcy," CEPR Discussion Papers 5035, C.E.P.R. Discussion Papers.
    5. 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.
    6. Sami, Hind, 2009. "Random monitoring in financing relationships," The Quarterly Review of Economics and Finance, Elsevier, pages 239-252.
    7. 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.

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