Public Versus Private Borrowing: A Theory with Implications for Bankruptcy Reform

Posted: 10 May 2000

See all articles by Enrica Detragiache

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Abstract

A model is presented in which firms optimally finance investments with both public and private debt. The two instruments are perfect substitutes, except that private debt can easily be renegotiated in insolvency states while public debt cannot. The option to renegotiate is beneficial ex post, as it allows the firm to avoid inefficient liquidation, but ex ante it may worsen asset substitution. The welfare effects of alternative bankruptcy regimes are then compared, taking into account that firms modify their financing decision in response to the regime change. Some suggestions for reforming Chapter 11 of the US bankruptcy code are presented:

JEL Classification: G32, G33, K2

Suggested Citation

Detragiache, Enrica, Public Versus Private Borrowing: A Theory with Implications for Bankruptcy Reform. JOURNAL OF FINANCIAL INTERMEDIATION Vol 3 No 4, 1994. Available at SSRN: https://ssrn.com/abstract=5712

Enrica Detragiache (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,028
PlumX Metrics