IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Can bankruptcy law discriminate between heterogeneous firms when information is incomplete ? The case of legal sanctions

Listed author(s):
  • Régis Blazy


    (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)

We study conditions under which legal sanctions may lead to an efficient selection of heterogeneous investment projects. The bankruptcy code is a "primitive creditor system" and financial distress leads to an arbitration between private agreement and costly formal bankruptcy. We consider a standard debt contract between a bank and a small firm, both risk-neutral. There are two types of leveraged firms in the economy: profitable firms and non-profitable ones. Before the debt repayment time, firms arbitrate between continuation and voluntary liquidation (considered strategies may be pure or mixed). Non-profitable firms may be incited to pursue business because of limited liability. The legislator computes a collectively optimal level of legal sanctions that incites good firms to continue and bad ones to liquidate. For any level of legal sanctions, we show that costly formal bankruptcies may occur at equilibrium and the internalization of bankruptcy costs is impossible. Besides, when bankruptcy costs are not too high, an infinite level of legal sanctions may allow such a selection among heterogeneous firms. Nevertheless, because legal sanctions are bound to the level of the assets shortage, the legislator's action only leads to a second best optimum.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2004-09.

in new window

Date of creation: 2004
Handle: RePEc:lar:wpaper:2004-09
Contact details of provider: Postal:
61, Avenue de la Forêt Noire, F-67085 Strasbourg Cedex

Phone: (33) 3 90 41 41 30
Fax: (33) 3 90 41 40 50
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lar:wpaper:2004-09. 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: (Christophe J. Godlewski)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.