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Public Policy toward Bankruptcy: Me-First and Other Priority Rules

Michelle J. White
The Bell Journal of Economics
Vol. 11, No. 2 (Autumn, 1980), pp. 550-564
Published by: RAND Corporation
DOI: 10.2307/3003379
Stable URL: http://www.jstor.org/stable/3003379
Page Count: 15
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Public Policy toward Bankruptcy: Me-First and Other Priority Rules
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Abstract

This article analyzes the economic efficiency properties of bankruptcy liquidation rules, including both conventional legal rules and the me-first rule proposed by economists. It also examines the incentives of firms to undertake investment projects when bankruptcy is a possible outcome. The results show that none of the rules leads to private investment incentives which are socially efficient. Depending on circumstances, it may be privately profitable to liquidate firms which should be continued or to continue firms which should be liquidated. Investments in low productivity projects may be approved while worthwhile projects may be abandoned. Public policy implications are considered.

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