Bankruptcy Reforms When Workers Extract Rents
Alessandro Peri ()
No 776, 2017 Meeting Papers from Society for Economic Dynamics
Firms file for bankruptcy reorganization (Chapter 11) not only to restructure debt but also to restructure labor contracts. Starting from this observation, I build a theory where shareholders weigh the cost of restructuring labor contracts against their claims on the going-concern value of the firm. In this environment, pro-creditor bankruptcy reforms face a trade-off. Upon successful reorganization, creditors recover more at the expenses of the other stake-holders: shareholders get a smaller share of the firm’s value, have less incentives to restructure labor contracts, making more likely that reorganizations fail and firms get inefficiently liquidated. As a result, expected recovery values can actually fall, increasing the cost of debt. I characterize this trade-off in a static model and show analytically that the optimal level of creditor rights decreases with the bargaining power of the workers. I test the positive implications of the theory in the U.S. data by exploiting a shift towards a more creditor-friendly Chapter 11 in 2001 and heterogeneity in right-to-work (RTW) labor laws. I estimate a firm dynamic model to the pre-2001 period, and gauge a significant asymmetric effect of the shift in the creditor rights on RTW vis-a-vis non-RTW region.
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:776
Access Statistics for this paper
More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().