An Incomplete Contracts Approach to Corporate Bankruptcy

Erik Berglof, Gérard Roland and Ernst-Ludwig von Thadden

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an incomplete contract framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules, therefore, are a necessary part of the overall financing contract, to make claims consisitent and to prevent a value reducing run for the assets of the firm. Furthermore, a too unequal allocation of security rights is not optimal, and creditors are not treated asymmetrically in default under the optimal contract.

Keywords: bankruptcy; debt structure; contracts (search for similar items in EconPapers)
JEL-codes: G3 K2 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2000-04, Revised 2002-04
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-ind, nep-law and nep-mic
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:00.12

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