IDEAS home Printed from https://ideas.repec.org/p/fip/fedcwp/0304.html
   My bibliography  Save this paper

Nearsighted justice

Author

Listed:
  • Dan Bernhardt
  • Ed Nosal

Abstract

Chapter 11 structures complex negotiations between creditors and debtors that are overseen by a bankruptcy court. This paper identifies conditions under which it is optimal for the court to sometimes err in determining whether a firm should be liquidated. Such errors can affect the optimal action choices by both good and bad entrepreneurs. We first characterize the optimal error rate without renegotiation, providing conditions under which it is optimal for the court both to sometimes mistakenly liquidate "good firms," but not "bad firms." When creditors and debtors can renegotiate to circumvent an error-riven court and creditors have all of the bargaining power, we show that for a broad class of action choices, a blind court--one that ignores all information and hence is equally likely to liquidate a good firm as a bad one--is optimal.

Suggested Citation

  • Dan Bernhardt & Ed Nosal, 2003. "Nearsighted justice," Working Paper 0304, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0304
    as

    Download full text from publisher

    File URL: https://www.clevelandfed.org/~/media/content/newsroom%20and%20events/publications/working%20papers/2003/wp%200304%20nearsighted%20justice%20pdf.pdf?la=en
    File Function: Full text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Shin Hyun Song, 1994. "The Burden of Proof in a Game of Persuasion," Journal of Economic Theory, Elsevier, vol. 64(1), pages 253-264, October.
    2. Michael J. Fishman & Kathleen M. Hagerty, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 427-444.
    3. Grossman, Gene M & Katz, Michael L, 1983. "Plea Bargaining and Social Welfare," American Economic Review, American Economic Association, vol. 73(4), pages 749-757, September.
    4. Spier, Kathryn E, 1994. "Settlement Bargaining and the Design of Damage Awards," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(1), pages 84-95, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ronel Elul & Piero Gottardi, 2015. "Bankruptcy: Is It Enough to Forgive or Must We Also Forget?," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 294-338, November.
    2. Dominique Demougin & Claude Fluet, 2008. "Rules of proof, courts, and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 20-40.
    3. Franks, Julian R & Lóránth, Gyöngyi, 2005. "A Study of Inefficient Going Concerns in Bankruptcy," CEPR Discussion Papers 5035, C.E.P.R. Discussion Papers.
    4. Nicola Gennaioli & Stefano Rossi, 2010. "Judicial Discretion in Corporate Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 4078-4114, November.
    5. repec:spr:busres:v:10:y:2017:i:2:d:10.1007_s40685-017-0047-x is not listed on IDEAS
    6. Sami, Hind, 2009. "Random monitoring in financing relationships," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 239-252, May.
    7. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.

    More about this item

    Keywords

    Bankruptcy;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedcwp:0304. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (4D Library). General contact details of provider: http://edirc.repec.org/data/frbclus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.