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Bankruptcy and Entrepreneurship: The Value of a Fresh Start

39 Pages Posted: 8 Dec 2003  

Kenneth Ayotte

University of California, Berkeley - School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2004

Abstract

This paper considers bankruptcy law design in a setting that is appropriate for entrepreneurial firms. These firms are characterized by a dependence on an owner-manager who is essential to the firm and must be given incentive through an ownership stake to maximize the value of the project. The relationship banks that fund entrepreneurs cannot capture the gains from providing the entrepreneur with this stake and this leaves the entrepreneur emerging from bankruptcy with a larger debt burden than is socially efficient. In this setting, a fresh start bankruptcy policy provides greater debt relief than the bank would approve voluntarily, and this generates greater social surplus. The results shed light on the ongoing debate over a separate small-business bankruptcy chapter resembling the current Chapter 13.

Keywords: Bankruptcy, entrepreneurship, Chapter 11, Chapter 13, absolute priority, fresh start

JEL Classification: G0, G2, G3, K0, K2

Suggested Citation

Ayotte, Kenneth, Bankruptcy and Entrepreneurship: The Value of a Fresh Start (September 15, 2004). Available at SSRN: https://ssrn.com/abstract=463000 or http://dx.doi.org/10.2139/ssrn.463000

Kenneth Ayotte (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

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