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The Choice between Reorganization and Deferred Payment for Troubled Businesses


  • Jue-Shyan Wang

    (Department of Public Finance, National Chengchi University, Taiwan)

  • Pei-Hsin Tsai

    (Department of Public Finance, National Chengchi University, Taiwan)


A solid and sound bankruptcy system is a crucial pillar that is needed to sustain the stability of any competitive, free-market economy and to protect any highly-developed financial market from serious crashes. When faced with the demands of creditor banks, a firm in financial distress will usually prefer to negotiate an informal arrangement of deferred payments rather than to go directly into a formal bankruptcy process. This paper considers small firms and sets up two systems of game-theoretic models. Furthermore, this paper utilizes backward induction, which starts from the last period, to obtain the solution. We discuss the optimal strategy for distressed firms choosing between bankruptcy and a debt negotiation in which the payment date is postponed for one period.

Suggested Citation

  • Jue-Shyan Wang & Pei-Hsin Tsai, 2009. "The Choice between Reorganization and Deferred Payment for Troubled Businesses," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(1), pages 83-110, January.
  • Handle: RePEc:jec:journl:v:5:y:2009:i:1:p:83-110

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    References listed on IDEAS

    1. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    2. Pirrong, Stephen Craig, 1993. "Contracting Practices in Bulk Shipping Markets: A Transactions Cost Explanation," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 937-976, October.
    3. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-1093, December.
    4. Gatignon, Hubert & Anderson, Erin, 1988. "The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(2), pages 305-336, Fall.
    5. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-185, March.
    6. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
    7. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
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    More about this item


    financial distress; bankruptcy; reorganization; deferred payment;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics


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