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Insolvency administrator’s incentives and the tradeoff between creditor satisfaction and efficiency in bankruptcy procedures

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  • Matthias Frieden

    () (Leibniz-University Hanover)

  • Stefan Wielenberg

    () (Leibniz-University Hanover)

Abstract

Abstract An insolvency administrator replaces the manager of an insolvent firm to devise and organize a liquidation or reorganization plan in the creditors’ interest. In the course of the process, the insolvency administrator presents the most favourable option from his perspective, and the creditors choose to accept or reject this plan. Conflicts of interest arise because the insolvency administrator, as the better-informed party, considers in his proposal liability risks and reputational issues that are beyond the creditors’ scope. We model this conflict as a Bayesian game and find that, under those compensation schemes typically used in real-world regulations, optimal creditor satisfaction and efficient decisions concerning the economic future of the insolvent firm will never be achieved simultaneously.

Suggested Citation

  • Matthias Frieden & Stefan Wielenberg, 2017. "Insolvency administrator’s incentives and the tradeoff between creditor satisfaction and efficiency in bankruptcy procedures," Business Research, Springer;German Academic Association for Business Research, vol. 10(2), pages 159-187, October.
  • Handle: RePEc:spr:busres:v:10:y:2017:i:2:d:10.1007_s40685-017-0047-x
    DOI: 10.1007/s40685-017-0047-x
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    References listed on IDEAS

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    7. White, Michelle J, 1994. "Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 268-295, October.
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    Cited by:

    1. Dinev, Nikolay, 2017. "Voluntary Bankruptcy as Preemptive Persuasion," Economics Series 334, Institute for Advanced Studies.

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