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Carrots and Sticks as Incentive Mechanisms for the Optimal Initiation of Insolvency Proceedings

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  • Jaka Cepec

    (University of Ljubljana, Faculty of Economics)

  • Mitja Kovac

    (University of Ljubljana, Faculty of Economics)

Abstract

The pursuit of ex-ante efficiency in bankruptcy law has been widely discussed in recent law and economics literature. However, the exact incentive mechanisms inducing the optimal commencement of bankruptcy proceedings have generally been exempted from the current scholarly debate. Using the law and economics tools and comparative analysis, this paper seeks to identify insolvency-specific optimal incentive mechanisms, while using the general theory on carrots and sticks in legal regulations. The paper suggests the employment of mixed-sticks-and-carrots incentive mechanisms for managers' prompt proposals of insolvency proceedings as an optimal regulatory response. Moreover, the article provides comparative evidence that exclusive use of sticks or carrots in French, German, US, English, and Slovenian legal systems results in sub-optimal initiation of insolvency proceedings and may also induce adverse effects on prompt initiation.

Suggested Citation

  • Jaka Cepec & Mitja Kovac, 2016. "Carrots and Sticks as Incentive Mechanisms for the Optimal Initiation of Insolvency Proceedings," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 79-103, June.
    • Handle: RePEc:cmn:journl:y:2016:i:2:p:79-103
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    References listed on IDEAS

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    Cited by:

    1. Cepec, Jaka & Grajzl, Peter, 2020. "Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival," International Review of Law and Economics, Elsevier, vol. 61(C).
    2. Stef, Nicolae, 2022. "How does legal design affect the initiation of a firm's bankruptcy?," Economic Modelling, Elsevier, vol. 114(C).
    3. Morawska Sylwia & Prusak Błażej & Banasik Przemysław & Woźniak-Jęchorek Beata, 2019. "Sanctions and their role in preventing the appropriation of the creditor’s property rights in bankruptcy proceedings–the case of Poland," Economics and Business Review, Sciendo, vol. 5(1), pages 93-113, March.
    4. Nina Ponikvar & Katja Zajc Kejžar & Darja Peljhan, 2018. "The role of financial constraints for alternative firm exit modes," Small Business Economics, Springer, vol. 51(1), pages 85-103, June.

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