Economics of Bankruptcy

This chapter presents a review bankruptcy law. It examines whether and when the law encourages debtors and creditors to behave economically efficient ways, both before and after they are in financial distress. It also considers how bankruptcy law could be changed to improve economic efficiency. The discussion abstracts from individual countries’ bankruptcy laws in order to focus on common features of bankruptcy. However, because much of the literature on economic effects of bankruptcy law is US-based, the discussion often focuses on US bankruptcy law in particular. The chapter first examines corporate bankruptcy and then turns to personal and small business bankruptcy.