Empirical Test of Contractualism in Bankruptcy Theory

A paper by Elizabeth Warren (Harvard) and Jay Westbrook (Texas), Contracting Out of Bankruptcy: An Empirical Intervention, assesses the efficacy of contractualism in the bankruptcy context.  What they find, in part, is that: 

"Data from the Business Bankruptcy Project show that, contrary to the assumptions of the contractualists, there are many claimants in business bankruptcy cases and many of them are poorly adjusting creditors who would be unable to negotiate or adjust their prices. These findings point toward substantial inefficiencies and costs arising from the contractualist proposals, and severely undermine the case for a contractual bankruptcy system."

Comments

[bouwgronden te koop]

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[Bob Rasmussen]

As I've written elsewhere (Empirically Bankrupt, forthcoming Columbia Law & Bus. Rev (available on SSRN)), the Warren and Westbrook study has a number of flaws that undermine its conclusions. First, half of their data comes from individual debtors. Bankruptcy choice regimes, by their explicit terms, are limited to corporations.

Second, the study collects no data on the recovery to the unsecured creditors on which its conclusions rest. Data from other studies strongly suggests that the median recovery for the unsecured creditors in their data set is zero. There cannot be redistribution from folks that are today recovering nothing.

Finally, the paper assumes a linear relationship between the transaction costs of bankruptcy choice and the number of creditors that a debtor has, and that these costs would be substantial. Bankruptcy choice proposals, however, have mechanisms designed to ensure that the choice of the bankrutpcy regime is communicated at low cost. Moreover,the paper has no data at all on the question of what the regimes would, in fact, cost.