Are Bankruptcy Professional Fees Excessively High?
64 Pages Posted: 31 Mar 2020 Last revised: 17 Dec 2021
Date Written: December 16, 2021
Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are massive. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I show empirically that most fees are actually an avoidable consequence of a suboptimal bankruptcy code. In Chapter 7, the key professional is a trustee, who liquidates assets in exchange for legally-mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. While reducing commissions would harm trustee incentives, lowering liquidation values, I nonetheless find that lower commissions would benefit creditors enormously. The law that specifies commissions is thus far more costly than the moral hazard problem it aims to solve.
Keywords: bankruptcy, recovery rate, structural estimation, bunching, moral hazard
JEL Classification: G33, G38, K22
Suggested Citation: Suggested Citation