Tax claims, government priority, absolute priority and the resolution of financial distress

Timothy Fisher, Jocelyn Martel and Ilanit Gavious

International Review of Law and Economics, 2016, vol. 48, issue C, 50-58

Abstract: We present a model of an insolvent firm that may take advantage of a ‘soft-touch’ government creditor in order to buy time before filing for reorganization, behaviour we refer to as ‘claims substitution.’ Parameters in the model reflect the enforcement of absolute priority and government priority in bankruptcy. We show that deviations from absolute priority reduce the incentive for claims substitution. We also show that strict government priority is economically efficient. We discuss the implications of our findings for bankruptcy law reform, especially with respect to the priority of tax claims in bankruptcy and the enforcement of absolute priority.

Keywords: Tax claims; Government priority; Absolute priority; Financial distress (search for similar items in EconPapers)
JEL-codes: G33 G38 K22 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:48:y:2016:i:c:p:50-58

DOI: 10.1016/j.irle.2016.08.003

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