Financial and Operational Creditors in Bankruptcy Resolution: A General Equilibrium Approach Under Three Game-Theoretic Division Rules with an Application to India

Prasad Rohit () and Iyer S. Veena ()
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Prasad Rohit: Management Development Institute Gurgaon, C-11, Scholars Block, Mehrauli Road, Sukhrali 122007, Gurugram, India
Iyer S. Veena: Management Development Institute Gurgaon, B-9, Scholars Block, Mehrauli Road, Sukhrali 122007, Gurugram, India

The B.E. Journal of Theoretical Economics, 2024, vol. 24, issue 1, 195-233

Abstract: The existing literature on bankruptcy division either ignores creditor type or focuses on secured and unsecured creditors, subsuming operational creditors in the latter category. Further, implications for the debtor and the economy as a whole are under-emphasized. We build a general equilibrium model with default using three game-theoretic division rules to examine the appropriate adjudication of the claims of financial and operational creditors for optimum output and firm profits as well as creditor welfare. Our paper extends and enriches the normative discussion on these game-theoretic division rules. The analysis indicates that the proportion of claims held by financial and operational creditors is a key determinant of overall outcomes, and that interests of the corporate debtor represent common ground that could soften creditor competition. Using a dataset of bankruptcy resolution cases from India, we identify the specific rules that approximate actual payout for different claim proportions and deduce the overriding power of financial creditors. Institutional changes that would result in better long-term outcomes are proposed.

Keywords: operational creditors; financial creditors; general equilibrium; game-theoretic bankruptcy division rules; India (search for similar items in EconPapers)
JEL-codes: C70 D50 G33 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejte-2023-0031

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