Abstract

http://ssrn.com/abstract=1146877
 
 

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Bankruptcy and Entrepreneurship: The Value of a Fresh Start


Kenneth Ayotte


University of California, Berkeley - School of Law

April 2007

The Journal of Law, Economics, & Organization, Vol. 23, Issue 1, pp. 161-185, 2007

Abstract:     
This article considers bankruptcy law design in a setting that is appropriate for entrepreneurial firms. These firms are characterized by a dependence on an owner-manager who is essential to the firm and must be given incentive through an ownership stake to maximize the value of the project. In a relationship-lending environment, the banks that fund entrepreneurs cannot capture the gains from providing the entrepreneur with this stake, and this leaves the entrepreneur emerging from bankruptcy with a larger debt burden than is socially efficient. In this setting, a fresh-start bankruptcy policy provides greater debt relief than the bank would approve voluntarily, and this generates greater social surplus. The results suggest the value of separate procedures for small business bankruptcies that allow some mandatory debt relief to preserve ex post incentives.

Accepted Paper Series


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Date posted: June 17, 2008  

Suggested Citation

Ayotte, Kenneth, Bankruptcy and Entrepreneurship: The Value of a Fresh Start (April 2007). The Journal of Law, Economics, & Organization, Vol. 23, Issue 1, pp. 161-185, 2007. Available at SSRN: http://ssrn.com/abstract=1146877 or http://dx.doi.org/10.1093/jleo/ewm007

Contact Information

Kenneth Ayotte (Contact Author)
University of California, Berkeley - School of Law ( email )
215 Boalt Hall
Berkeley, CA 94720-7200
United States
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