Download This PaperAre Bankruptcy Professional Fees Excessively High?
91 Pages Posted: 31 Mar 2020 Last revised: 30 Jan 2024
Date Written: June 24, 2024
Abstract
Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are substantial. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I test this empirically. I study trustees, the most important professionals in Chapter 7, who liquidate assets in exchange for legally-mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. I show that a policy change lowering trustee fees would harm trustee incentives, reducing liquidation values. Nonetheless, such a policy would dramatically improve creditor recovery, increasing small-business-lender recovery by 15.7%.
Keywords: bankruptcy, recovery rate, structural estimation, bunching
JEL Classification: G33, G38, K22
Suggested Citation: Suggested Citation
