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Bankruptcy Procedures with Ex Post Moral Hazard

The optimal design of credit contracts and bankruptcy procedures is an important policy question both in developed market economies and in countries with emerging markets. In this paper I deal with several theoretical considerations related to these important policy problems. My main concern is with the impact of relaxation of bankruptcy procedures providing for a possibility of a renegotiation of the debt instead of strictly imposing bankruptcy whenever the debtor falls into a default on his debt. I deal with this problem in a context of collateralized debt contracts in the conditions of imperfect information about the prospects of the entrepreneur and about the results of his project.

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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 61.

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Length: 18 pages
Date of creation: 2004
Date of revision: 2004
Handle: RePEc:fau:wpaper:wp061
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  1. Maskin, Eric & Xu, Cheng-Gang, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
  2. Coco, Giuseppe, 2000. " On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
  3. Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers 9807, Centro de Estudios Monetarios Y Financieros-.
  4. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank.
  5. Chongwoo Choe, 1995. "Contract Design and Costly Verification Games," Working Papers 1995.18, School of Economics, La Trobe University.
  6. Schaffer, Mark E., 1989. "The credible-commitment problem in the center-enterprise relationship," Journal of Comparative Economics, Elsevier, vol. 13(3), pages 359-382, September.
  7. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
  8. Bester, Helmut, 1994. "The Role of Collateral in a Model of Debt Renegotiation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 72-86, February.
  9. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
  10. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
  11. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
  12. repec:oup:qjecon:v:90:y:1976:i:4:p:630-49 is not listed on IDEAS
  13. Scheepens, Joris P. J. F., 1995. "Bankruptcy litigation and optimal debt contracts," European Journal of Political Economy, Elsevier, vol. 11(3), pages 535-556, September.
  14. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  15. M. Martin Boyer, 2001. "Project Financing when the Principal Cannot Commit," CIRANO Working Papers 2001s-29, CIRANO.
  16. Schmidt-Mohr, Udo, 1997. "Rationing versus collateralization in competitive and monopolistic credit markets with asymmetric information," European Economic Review, Elsevier, vol. 41(7), pages 1321-1342, July.
  17. John P. Bonin & Mark E. Schaffer, 1999. "Revisiting Hungary's Bankruptcy Episode," William Davidson Institute Working Papers Series 255, William Davidson Institute at the University of Michigan.
  18. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
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