Perspectives on optimal bankruptcy policy design (Delaware)

This doctoral dissertation contains three essays on corporate bankruptcy with implications for optimal policy design.; The first chapter is entitled “Bankruptcy and Entrepreneurship: The Value of a Fresh Start.” It considers optimal bankruptcy policy for entrepreneurial firms, whose value depends on the ownership and effort of a key individual. Since entrepreneurs are wealth-constrained, they must borrow from a bank to finance the firm; giving the bank a claim reduces incentive for entrepreneurial effort. This, combined with the market power of banks that follows from an informational advantage, creates a setting in which a mandatory discharge of debt (a “fresh start”) achieves social gains relative to a private contracting outcome when the entrepreneur fails.; The second chapter is entitled “Why Do Distressed Firms Choose Delaware? Venue Choice and Court Experience in Bankruptcy” with David A. Skeel, Jr. The paper is an empirical investigation of the factors that determine the choice of court when a firm files for Chapter 11. We find that court experience is a significant factor in predicting where a firm files and the outcomes that result. We focus on the Delaware court and find that firms most likely to file there are firms located in states with less experienced courts and firms that are more likely to face a longer bankruptcy. We find that greater court experience leads to a greater likelihood of reorganization and faster cases.; The third chapter is entitled, “Future Claimants and Risk Allocation in Mass Tort Bankruptcy” with Yair Listokin. We study issues surrounding firms that file to manage mass tort liabilities. In particular, complications arise when a limited pool of funds must be divided between present claimants, contract creditors, and an unknown number of future claimants. Our model has two main prescriptions. First, future claimants should receive greater payment in expectation than present claimants since they bear the risk of uncertain future claims. Second, pre-petition contract creditors should occupy a position in the trust fund that is junior to tort claimants in order to shift as much of the claimant risk to contract creditors as possible.