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Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy Reform in Colombia

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  • Xavier Giné
  • Inessa Love

Abstract

An efficient bankruptcy system should liquidate nonviable businesses and reorganize viable ones. The importance of this filtering process has long been recognized in the literature; the typical reason advanced for its failure has been biases (in codes or among judges). In this paper we show that bankruptcy costs can be another source of such filtering failure. We illustrate this with the Colombian reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, we find that the prereform reorganization proceedings were so inefficient that the bankruptcy system failed to separate economically viable firms from inefficient ones. In contrast, by streamlining the reorganization process, the reform contributed to the improvement of the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.

Suggested Citation

  • Xavier Giné & Inessa Love, 2010. "Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy Reform in Colombia," Journal of Law and Economics, University of Chicago Press, vol. 53(4), pages 833-864.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/605848
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    Cited by:

    1. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.
    2. Kerr, William R. & Nanda, Ramana, 2009. "Democratizing entry: Banking deregulations, financing constraints, and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 94(1), pages 124-149, October.
    3. International Finance Corporation & World Bank, 2009. "Doing Business 2010 : Reforming through Difficult Times - Comparing Regulation in 183 Economies," World Bank Publications, The World Bank, number 2562.
    4. David McKenzie, 2010. "Impact Assessments in Finance and Private Sector Development: What Have We Learned and What Should We Learn?," World Bank Research Observer, World Bank Group, vol. 25(2), pages 209-233, August.
    5. Cadot, Olivier & Fernandes, Ana M. & Gourdon, Julien & Mattoo, Aaditya, 2011. "Impact evaluation of trade interventions : paving the way," Policy Research Working Paper Series 5877, The World Bank.
    6. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.

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