Abstract
This article uses a game theoretic model of Chapter 11 bankruptcy and out-of-court debt restructuring to evaluate the economic efficiency of U. S. bankruptcy procedures. The model assumes that there are two types of failing firms: economically inefficient firms that should liquidate and economically efficient firms that should be saved. From an efficiency standpoint, the goal of corporate bankruptcy procedures is to liquidate the former under Chapter 7 and save the latter by reorganization under Chapter 11--that is, to filter out inefficient firms. However, it is difficult to identify which failing firms are inefficient, so bankruptcy procedures may operate with error. The model shows that a pooling equilibrium may occur in which both efficient and inefficient failing firms reorganize under Chapter 11. Adding restructuring as a bankruptcy alternative appears to make things worse, since the transactions cost savings in restructuring compared to reorganization makes the inefficient equilibrium more likely to occur.
Journal Information
The Journal of Law, Economics & Organization is an interdisciplinary exercise. It seeks to promote an understanding of many complex phenomena by examining such matters from a combined law, economics, and organization perspective (or a two-way combination thereof). In this connection, we use the term organization broadly - to include scholarship drawing on political science, psychology and sociology, among other fields. It also holds the study of institutions - especially economic, legal, and political institutions - to be specifically important and greatly in need of careful analytic study.
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Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. OUP is the world's largest university press with the widest global presence. It currently publishes more than 6,000 new publications a year, has offices in around fifty countries, and employs more than 5,500 people worldwide. It has become familiar to millions through a diverse publishing program that includes scholarly works in all academic disciplines, bibles, music, school and college textbooks, business books, dictionaries and reference books, and academic journals.
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journal article
Why Organizations Fail: Models and CasesJournal of Economic Literature
Vol. 54, No. 1 (MARCH 2016)
, pp. 137-192 (56 pages)
Published By: American Economic Association
//www.jstor.org/stable/43932444
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Abstract
Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to short-termism and the allocation of authority, both of which are instances of "multitasking problems"; communicationé failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and ngid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures.
Journal Information
The Journal of Economic Literature (JEL), first published in 1969, is designed to help economists keep abreast of the vast flow of literature. JEL issues contain commissioned, peer-reviewed survey and review articles, book reviews, an annotated bibliography of new books classified by subject matter, and an annual index of dissertations in North American universities.
Publisher Information
Once composed primarily of college and university professors in economics, the American Economic Association (AEA) now attracts 20,000+ members from academe, business, government, and consulting groups within diverse disciplines from multi-cultural backgrounds. All are professionals or graduate-level students dedicated to economics research and teaching.
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This item is part of a JSTOR Collection.
For terms and use, please refer to our Terms and Conditions
Journal of Economic Literature © 2016
American Economic Association
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