Matching Bankruptcy Laws to Legal Environments

Posted: 13 Apr 2009

See all articles by Kenneth Ayotte

Kenneth Ayotte

University of California, Berkeley - School of Law

Hayong Yun

Michigan State University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the expertise of judges and the quality of contract enforcement. We analyze a model in which a judicially influenced bankruptcy process can enhance the efficiency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on firm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment and show that the optimal degree of “creditor-friendliness” in the bankruptcy code increases as judicial ability to recognize firm quality falls and as the quality of contract enforcement deteriorates. Our model shows that a bankruptcy law that attempts to preserve going-concern value, such as US Chapter 11, requires judicial expertise to be effective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. (JEL D86, G33, G34, K22)

Suggested Citation

Ayotte, Kenneth and Yun, Hayong, Matching Bankruptcy Laws to Legal Environments (May 2009). The Journal of Law, Economics, & Organization, Vol. 25, Issue 1, pp. 2-30, 2009. Available at SSRN: https://ssrn.com/abstract=1372574 or http://dx.doi.org/10.1093/jleo/ewm048

Kenneth Ayotte (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Hayong Yun

Michigan State University - Department of Finance ( email )

645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/site/hayongy/

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