Is corporate bankruptcy efficient?

Auctions allocate resources to their highest-valued uses. Yet bankruptcy does not use auctions. Instead judges determine a value and parcel out interests on the assumption that this valuation is correct. Errors inevitable in this process lead many persons to conclude that bankruptcy is inefficient....

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Bibliographic Details
Published in:Journal of financial economics 1990-10, Vol.27 (2), p.411-417
Main Author: Easterbrook, Frank H.
Format: Article
Language:English
Subjects:
Auctions
Bankruptcy
Corporate debt
Effects
Efficiency
Legal
Processes
Valuation
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Summary:Auctions allocate resources to their highest-valued uses. Yet bankruptcy does not use auctions. Instead judges determine a value and parcel out interests on the assumption that this valuation is correct. Errors inevitable in this process lead many persons to conclude that bankruptcy is inefficient. This essay argues that the conclusion does not follow. The costs of error in valuation may be less than the cost of conducting an auction. Legal rules endure because they are efficient or because they transfer wealth. Transfers are an implausible explanation of the current bankruptcy regime, leaving efficiency as the prevailing explanation.
ISSN:0304-405X
1879-2774
DOI:10.1016/0304-405X(90)90062-5