Dissecting Bankruptcy Frictions
60 Pages Posted: 20 May 2019 Last revised: 1 Nov 2019
Date Written: October 29, 2019
How efficient is corporate bankruptcy in the U.S.? Two economic frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We quantify these inefficiencies and their underlying causes using a structural estimation approach. We find that the bankruptcy process is quite inefficient, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by an additional 18%. Without these frictions, an extra 14% of cases would be resolved before going to court, and the remaining court cases would be 73% shorter. With less delay, the direct and indirect costs of bankruptcy would be much lower. In contrast, we find that inefficiencies from excess liquidation and excess continuation are quite small.
Keywords: bankruptcy, structural estimation, conflicts of interest, asymmetric information
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