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An Incomplete Contracts Approach to Corporate Bankruptcy


  • Erik BERGLÖF
  • Gérard ROLAND
  • Ernst-Ludwig VON THADDEN


This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an incomplete contract framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules, therefore, are a necessary part of the overall financing contract, to make claims consisitent and to prevent a value reducing run for the assets of the firm. Furthermore, a too unequal allocation of security rights is not optimal, and creditors are not treated asymmetrically in default under the optimal contract.

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  • Erik BERGLÖF & Gérard ROLAND & Ernst-Ludwig VON THADDEN, 2000. "An Incomplete Contracts Approach to Corporate Bankruptcy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.12, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2002.
  • Handle: RePEc:lau:crdeep:00.12

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    References listed on IDEAS

    1. Kjetil Storesletten, 2000. "Sustaining Fiscal Policy through Immigration," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 300-323, April.
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    5. Alan J. Auerbach & Laurence J. Kotlikoff & Robert P. Hagemann & Giuseppe Nicoletti, 1989. "The Economic Dynamics of an Ageing Population: The Case of Four OECD Countries," OECD Economics Department Working Papers 62, OECD Publishing.
    6. Gustman, Alan L. & Steinmeier, Thomas L., 1999. "Effects of pensions on savings: analysis with data from the health and retirement study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 271-324, June.
    7. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
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    Cited by:

    1. Itzhak Gilboa & David Schmeidler, 2003. "Inductive Inference: An Axiomatic Approach," Econometrica, Econometric Society, vol. 71(1), pages 1-26, January.
    2. Issam Hallak, 2004. "Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans," CSEF Working Papers 124, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Ulrich Hege & Pierre Mella-Barral, 2005. "Repeated Dilution of Diffusely Held Debt," The Journal of Business, University of Chicago Press, vol. 78(3), pages 737-786, May.
    4. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
    5. Hans K. Hvide & Todd Kaplan, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Microeconomics 0311001, EconWPA.
    6. Hainz, Christa, 2004. "Quality of Institutions, Credit Markets and Bankruptcy," Discussion Papers in Economics 388, University of Munich, Department of Economics.
    7. Daniela Fabbri, 2001. "The Legal Enforcement of Credit Contracts and the Level of Investment," CSEF Working Papers 57, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Antje Brunner & Jan Pieter Krahnen, 2008. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 415-442.
    9. Kenneth Ayotte & Hayong Yun, "undated". "Matching Bankruptcy Laws to Legal Environments," American Law & Economics Association Annual Meetings 1018, American Law & Economics Association.
    10. Gerhard Illing, 2000. "Bailing in the private sector," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 35(2), pages 64-71, March.

    More about this item


    bankruptcy; debt structure; contracts;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • K2 - Law and Economics - - Regulation and Business Law

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