Counter-Cyclical Bankruptcy Law: An Efficiency Argument for Employment-Preserving Bankruptcy Rules
42 Pages Posted: 25 Nov 2014 Last revised: 6 Nov 2016
Date Written: November 2, 2016
Bankruptcy judges consider both value to creditors and harm to employees in deciding whether to liquidate or reorganize firms. This Article proposes to systematize what is currently an ad hoc trade-off by making bankruptcy law explicitly counter-cyclical—that is, placing more weight on preserving employment during times of high unemployment. Although the suggestion that bankruptcy law should consider employment effects runs counter to decades of economic analysis of bankruptcy law, this Article bases its analysis on the traditional law and economics efficiency norm. During times of high unemployment, significant social benefits flow from maintaining employment, as evidenced by the hundreds of billions of dollars that the government has recently spent to maintain employment. The simple argument of this Article is that when bankruptcy law can preserve employment more cheaply than government spending can, it should do so.
Keywords: bankruptcy, law and economics
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