Ivo Welch (UCLA) "Contracting Externalities and Unrepudiable Menus in the U.S. Corporate Bankruptcy Code"

Event
Monday, April 28, 2014 - 4:10 pm to 5:30 pm
Event Type: 

Location:  368A Heady Hall

Description:  Ivo Welch (UCLA) "Contracting Externalities and Unrepudiable Menus in the U.S. Corporate Bankruptcy Code"

Abstract:  Our paper offers the first justification for the U.S. bankruptcy code, in which firms are not allowed to commit themselves ex-ante in their lending agreements either to (Chapter 7) liquidation or to (Chapter 11) reorganization in case of distress. If fire-sale liquidation imposes negative externalities on their peers, then firms are collectively better off if they are all forced into a no-opt-out choice (a mandatory “menu”), although they would individually want to commit themselves to liquidation. The ex-post menu choice is important: prohibiting liquidation outright would be worse. Our paper’s innovation is thus to show not when a later choice should be prohibited, but when a later choice should be mandatory. Equivalent analyses could justify when other ex-post choices should remain inalienable (not contractible).

Contact Person:  David Frankel

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