Bankruptcy as a Control Device in Economies in Transition

J. OF COMPARATIVE ECONOMICS, Vol. 20 No. 3, June 1995

Posted: 5 Jul 1998

See all articles by Patrick Legros

Patrick Legros

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Northeastern University, department of economics; Centre for Economic Policy Research (CEPR)

Janet Mitchell

National Bank of Belgium - Department of Financial Stability; Centre for Economic Policy Research (CEPR)

Abstract

We examine in this paper the design of a liquidation, or bankruptcy, policy in a partially centralized economy characterized by imperfect information. We employ a two-period model to analyze the effects of an optimal liquidation rule on the efficiency of resource allocation and choice of managerial effort when managers have private information about effort and firm productivity. First-period investment is used by the regulator to discipline the manager and to extract information. The tradeoff between disciplinary effect and information extraction might be best solved by implementing inefficient liquidation policies. Inefficiencies in liquidation policies can occur even if the regulator believes that he is facing a given type of firm with probability close to one.

JEL Classification: G33

Suggested Citation

Legros, Patrick and Mitchell, Janet, Bankruptcy as a Control Device in Economies in Transition. J. OF COMPARATIVE ECONOMICS, Vol. 20 No. 3, June 1995. Available at SSRN: https://ssrn.com/abstract=7158

Patrick Legros

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4219/3 (Phone)
+32 2 650 4475 (Fax)

Northeastern University, department of economics ( email )

301 Lake Hall
Boston, MA 02115
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Janet Mitchell (Contact Author)

National Bank of Belgium - Department of Financial Stability ( email )

14 Blvd de Berlaimont
B-1000 Brussels
Belgium
+32 2 221 3459 (Phone)
+32 2 221 3104 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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