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What Is Missing in Corporate Bankruptcy Theories? Revisiting the Efficiency Rationale
Israel L. Rev. (2006)
  • Yaad Rotem, University of California, Berkeley

What is corporate bankruptcy law’s unique function in the economy? Law and economics scholars reject using it to achieve purely redistributive purposes but this is where their agreement ends. Thus, two questions serve as focal points for debate: First, should the decision on how to redeploy in the economy the assets of the financially distressed firm be mandatory or enabling? Second, which decision-making mechanism should be employed by lawmakers? “First order” theories (arguing for and against a mandatory bankruptcy regime), or “second order” theories (arguing for and against different methods of mandatory decision-making) ensued as a result. Unfortunately, “third order” attempts to supply a convincing answer to the economic question—combining as part of the answer the many redistributive impulses displayed in any corporate bankruptcy setting—were few and scarce. Moreover, scholars have been arguing with each other without fully exhausting the discussion of the gap dividing them. An ex-ante point of view, highlighting the perspective of the debtor-firm’s relations with its consensual investors, was offered to lawmakers contemplating social wealth maximization, as a replacement to the conventional ex-post point of view, which emphasizes a more general societal perspective. The distinction between the two paradigms did not go unnoticed by scholars, but unexplainably, it failed to become the center of debate.

  • corporate bankruptcy,
  • efficiency,
  • creditors' bargain
Publication Date
Citation Information
Yaad Rotem. "What Is Missing in Corporate Bankruptcy Theories? Revisiting the Efficiency Rationale" Israel L. Rev. Vol. 39 Iss. 3 (2006)
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