Capture of Bankruptcy: Theory and Russian Evidence

Abstract

Laws that work well in a country with the rule of law may produce unexpected outcomes in a corrupt environment. We argue that the Russian legal system is impaired by the capture of regional divisions of arbitrage courts, and analyze the consequences of this capture. Using a theoretical model and an empirical analysis, we conclude the following: first, governors in alliance with managers of large regional enterprises use bankruptcy to expropriate the federal government and outside investors; and second, the bankruptcy law does not put pressure on mangers to restructure, instead, it may even prevent restructuring.