Two (Further) Possible Explanations of the Secured Debt Puzzle: A Note

Acta Oeconomica Pragensia, Vol. 14, No. 2, p. 117, 2006

5 Pages Posted: 13 Sep 2006

See all articles by Tomas Richter

Tomas Richter

Charles University in Prague - Department of Economics

Abstract

Since at least the early 1980's, students of financial economics and law & economics have puzzled over the question whether secured debt - and more importantly, its priority in bankruptcy, apparently ubiquitous in the real world - can or cannot be explained in terms of economic efficiency. The discussion, intellectually enticing as it may be, seems to lead nowhere. One would almost be tempted to discard the entire enterprise using Ronald Regan's alleged quote claiming that an economist is someone who will convince you that something that works perfectly well in practice cannot work in theory. Before that is done, I thought that I would contribute to the debate with two further possible explanations of the puzzle. My ambition is not to be conclusive - as evidenced by the fact that one of the explanations I forward is benign whereas the other one is malign. What I hope to show, however, is that a look from outside of the world of mature legal and other institutions can bring about observations that may perhaps slip the eye of the beholder who takes such institutions for granted.

Keywords: secured debt, security interests, priority, insolvency, bankruptcy, agency costs of debt

JEL Classification: K35, G33

Suggested Citation

Richter, Tomas, Two (Further) Possible Explanations of the Secured Debt Puzzle: A Note. Acta Oeconomica Pragensia, Vol. 14, No. 2, p. 117, 2006, Available at SSRN: https://ssrn.com/abstract=929692

Tomas Richter (Contact Author)

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague, 11000
Czech Republic

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