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A Solution to the Collective Action Problem in Corporate Reorganization

26 Pages Posted: 8 Sep 2013  

Eric A. Posner

University of Chicago - Law School

E. Glen Weyl

Microsoft Research; Yale University

Date Written: September 5, 2013

Abstract

The voting rules in Chapter 11 are supposed to ensure that debtor firms are appropriately liquidated or reorganized. However, these convoluted and internally inconsistent rules are poorly designed to produce such outcomes, and there is no evidence that they do. However, the major proposals for reform, including auctions and options-trading, neglect the fundamentally collective nature of choices in reorganizations. We argue that a more appealing reform is the improvement of voting rules through the use of an economically efficient procedure known as quadratic voting, according to which stakeholders may cast a number of votes equal to the square root of the liquidation value of their claims. We discuss how quadratic voting could be implemented through reform of Chapter 11 and the advantages it would bring.

Suggested Citation

Posner, Eric A. and Weyl, E. Glen, A Solution to the Collective Action Problem in Corporate Reorganization (September 5, 2013). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 653. Available at SSRN: https://ssrn.com/abstract=2321904

Eric A. Posner (Contact Author)

University of Chicago - Law School ( email )

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773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

Eric Glen Weyl

Microsoft Research ( email )

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HOME PAGE: http://www.glenweyl.com

Yale University ( email )

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