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Matching Bankruptcy Laws to Legal Environments


  • Hayong Yun


We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the expertise of judges and the quality of contract enforcement. We analyze a model in which a judicially influenced bankruptcy process can enhance the efficiency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on firm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment and show that the optimal degree of "creditor-friendliness" in the bankruptcy code increases as judicial ability to recognize firm quality falls and as the quality of contract enforcement deteriorates. Our model shows that a bankruptcy law that attempts to preserve going-concern value, such as US Chapter 11, requires judicial expertise to be effective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. (JEL D86, G33, G34, K22) The Author 2007. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email:, Oxford University Press.

Suggested Citation

  • Hayong Yun, 2009. "Matching Bankruptcy Laws to Legal Environments," Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(1), pages 2-30, May.
  • Handle: RePEc:oup:jleorg:v:25:y:2009:i:1:p:2-30

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    References listed on IDEAS

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    Cited by:

    1. Miguel García-Posada & Juan Mora-Sanguinetti, 2014. "Are there alternatives to bankruptcy? A study of small business distress in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 287-332, August.
    2. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 602-634.
    3. Dinev, Nikolay, 2017. "Voluntary Bankruptcy as Preemptive Persuasion," Economics Series 334, Institute for Advanced Studies.
    4. Tarantino, Emanuele, 2013. "Bankruptcy law and corporate investment decisions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2490-2500.
    5. Simeon Djankov & Oliver Hart & Caralee McLiesh & Andrei Shleifer, 2008. "Debt Enforcement around the World," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1105-1149, December.
    6. Rossi, Stefano & Yun, Hayong, 2015. "What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws," CEPR Discussion Papers 10984, C.E.P.R. Discussion Papers.
    7. Jérôme Sgard, 2010. "Bankruptcy Law, Majority Rule, and Private Ordering in England and France (Seventeenth-Nineteenth Century)," Working Papers hal-01069444, HAL.
    8. Barry E. Adler, 2012. "Game-Theoretic Bankruptcy Valuation," The Journal of Legal Studies, University of Chicago Press, vol. 41(1), pages 209-238.
    9. repec:eee:riibaf:v:42:y:2017:i:c:p:161-172 is not listed on IDEAS

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law


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