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Fast Bargaining in Bankruptcy

Listed author(s):
  • David Benjamin

I combine two previously separate strands of the bargaining literature to present a bargaining model with both one-sided private information and a majority vote for proposals to go into effect. I use this model to show that the US bankruptcy code produces shorter delays and higher welfare than the UK law. I consider the bargaining that occurs in bankruptcy between an informed firm and a set of uninformed creditors over a set of new debt contracts. The agents have an infinite horizon to bargain and cannot commit to a schedule of future offers. If individual creditors can be treated differently and a majority vote is required for the acceptance of new debt contracts, adding creditors increases the probability of reaching agreement by the end of any given period. The US regime has these features. I give numerical examples which show the efficiency gains from increasing the number of creditors are significant. The UK voting rule allows one creditor a veto of all plans. Replacing the majority voting rule with the UK voting rule and allowing only the creditor with the veto to suggest plans, I show that the UK regime has longer delays and is less efficient than the US regime as long as the US regime has multiple creditors

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 664.

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Date of creation: 2004
Handle: RePEc:red:sed004:664
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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