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Deliberation and Security Design in Bankruptcy

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  • Eraslan, Hulya

    (Rice University)

  • Mylovanov, Tymofiy

    (University of Pittsburgh)

  • Yilmaz, Bilge

    (University of PA)

Abstract

We consider negotiations among the claimants of a bankrupt firm in which claimants have private information about various operational restructuring alternatives, and can communicate prior to a proposal. Our setup differs from typical bargaining games with incomplete information in two ways. First, the proposals can be made using securities. Second, the negotiations are over two interdependent issues: what to do with the firm and who gets what. In line with Chapter 11 bankruptcy proceedings we first analyze the case in which both issues are negotiated simultaneously. We show that simultaneous negotiation leads to efficient operational restructuring. Moreover, any efficient equilibrium requires that the original senior claimants receive senior securities of the reorganized firm. Next, we analyze the cases in which the two issues are negotiated sequentially. If the first issue is what to do with the firm, then efficient operational restructuring is not possible. In contrast, if the first issue is who gets what, then sequential negotiation is efficient. In comparison to simultaneous negotiation, efficient sequential negotiation may result in junior claimant capturing a larger surplus.

Suggested Citation

  • Eraslan, Hulya & Mylovanov, Tymofiy & Yilmaz, Bilge, 2014. "Deliberation and Security Design in Bankruptcy," Working Papers 14-029, Rice University, Department of Economics.
  • Handle: RePEc:ecl:riceco:14-029
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    Cited by:

    1. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    2. Makoto Hanazono & Yasutora Watanabe, 2018. "Equity bargaining with common value," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(2), pages 251-292, March.

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