A Team Production Theory of Bankruptcy Reorganization

Abstract

This paper extends Professor Margaret Blair and Lynn Stout's pathbreaking Team Production Theory of Corporate Law to the bankruptcy reorganization of public companies. The paper begins by describing the prevailing contractarian theory of bankruptcy reorganization, the Creditors' Bargain theory propounded by Professor Thomas Jackson in 1982. The paper briefly describes the Team Production Theory of Corporate Law and then projects the consequences of that theory for the firm in bankruptcy. The final part of the paper compares the Team Production Theory of Bankruptcy Reorganization with the Creditors' Bargain theory, reaching two conclusions. First, the Team Production Theory of Bankruptcy Reorganization describes the bankruptcy system more accurately than does the Creditors' Bargain theory. Second, if the empirical assumptions underlying the Team Production Theory of Corporate Law theory are accurate, the ex ante maximization recommended by the Team Production Theory of Bankruptcy Reorganization will better serve the goal of economic efficiency than the ex post maximization recommended by the Creditors' Bargain theory.

Keywords: bankruptcy, bankruptcy reorganization, reorganization, creditors' bargain, team production, public companies, public corporations, externalization, board of directors, shareholder primacy, director primacy

JEL Classification: G33, D23, G34, K12, K22, L51