Carrots and Sticks as Incentive Mechanisms for the Optimal Initiation of Insolvency Proceedings

• Authors: Jaka Cepec , Mitja Kovac
• Languages of publication: EN

Abstracts

EN

The pursuit of ex-ante efficiency in bankruptcy law has been widely discussed in recent law and economics literature. However, the exact incentive mechanisms inducing the optimal commencement of bankruptcy proceedings have generally been exempted from the current scholarly debate. Using the law and economics tools and comparative analysis, this paper seeks to identify insolvency-specific optimal incentive mechanisms, while using the general theory on carrots and sticks in legal regulations. The paper suggests the employment of mixed-sticks-and-carrots incentive mechanisms for managers’ prompt proposals of insolvency proceedings as an optimal regulatory response. Moreover, the article provides comparative evidence that exclusive use of sticks or carrots in French, German, US, English, and Slovenian legal systems results in sub-optimal initiation of insolvency proceedings and may also induce adverse effects on prompt initiation.

Keywords

EN

Corporate Insolvency; Trigger Mechanisms; Incentives; Efficiency; Comparative Insolvency Law; Carrots and Sticks

• Publisher: Sciendo
• Journal: DANUBE: Law and Economics Review
• Year: 2016
• Volume: 7
• Issue: 2
• Pages: 79-103

Dates

published

2016-06-01

online

2016-07-07

Contributors

author

Jaka Cepec

• University of Ljubljana, Faculty of Economics, Kardeljeva ploscad 17, Ljubljana, SI – Slovenia

author

Mitja Kovac

• University of Ljubljana, Faculty of Economics, Kardeljeva ploscad 17, Ljubljana, SI – Slovenia

References

• Adler, B. E., Capkun, V., Weiss, L.A. (2006). Theory and Evidence on the Bankruptcy Initiation Problem. American Law & Economics Association Annual Meetings, Paper 53.
• Adler, B. E., Capkun V., Weiss, L.A. (2013). Value Destruction in the New Era of Chapter 11. The Journal of Law, Economics & Organization, 29(2), 461–483.[Crossref]
• Armour, J. (2001). The Law and Economics of Corporate Insolvency: A Review. ESRC Centre for Business Research, University of Cambridge Working paper, 197.
• Baird, D. G., Jackson, T. H. (1984). Possession and Ownership: An Examination of the Scope of Article 9. Stanford Law Review, 35, 175–212.
• Baird, D. G. (1991). The Initiation Problem in Bankruptcy. International Review of Law & Economics, 11(2), 223–232.
• Baird, D. G. (1996). A World without Bankruptcy. In Bhandari, J. S., Weiss, L.A. (Ed.). Corporate Insolvency, Economic and legal Perspectives. Cambridge University Press.
• Bebchuk, L.A. (2002). Ex ante Costs of Violating Absolute Priority in Bankruptcy. Journal of Finance, 57(1), 445–460.[Crossref]
• Bharath, S. T., Panchapakesan V., Werner I. (2007). The Changing Nature of Chapter 11. Working Paper, University of Michigan.
• Bowers, J.W., Whither. (1992). What Hits the Fan? Murphy’s Law, Bankruptcy Theory, and the Elementary Economics of Loss Distribution. Georgia Law Review, 1, 27–84.
• Cabrillo, F., Depoorter, B.W. (2000). Bankruptcy Proceedings. In Bouckaert, B., De Geest, G. (Ed.). Encyclopedia Of Law & Economics. Cheltenham, Northampton: Edward Elgar and The University Of Ghent.
• Cepec, J. (2014). Pravno ekonomska analiza insolvenčnih postopkov. Doctoral thesis, Universtity of Ljubljana, Faculty of Law.
• Cepec, J. (2013). Zakaj potrebujemo insolvenčno pravo?: perspektiva ekonomske analize prava. Lexonomica, 5(2), 163–178.
• Coase, R. H. (1960). The Problem of Social Cost. Journal of Law and Economics, 3, 1–70.
• Cooter, R., Ulen T. (2004). Law and Economics (4th ed.). Boston: Pearson.
• De Geest, G., Dari-Mattiacci, G. (2010). Carrots, Sticks, and the Multiplication Effect. The Journal of Law, Economics & Organization, 26(2), 365–384.[Crossref]
• De Geest, G., Dari-Mattiacci, G. (2013). The rise of carrots and the decline of sticks. University of Chicago Law Review, 80, 341–392.
• Eidenmüller, H. (2006). Trading in Times of Crisis: Formal Insolvency Proceedings, Workouts and the Incentives for Shareholders/Managers. European Business Organization Law Review, 7(1), 239–258.[Crossref]
• Euler Hermes Kreditversicherungs-AG. (2006). Zentrum für Insolvenz Universität Mannheim, Ursachen von Insolvenzen Gründe für Unternehmensinsolvenzen aus der sicht Von Insolvenzverwaltern. Wirtschaft Konkret Nr. 414.
• Frouté, P. (2007). Theoretical Foundation for a Debtor Friendly Bankruptcy Law in Favour of Creditors. European Journal of Law and Economics, 24(3), 201–214.[Crossref]
• Finch, V. (2009). Corporate Insolvency Law, Perspectives and Principles (Second Edition). Cambridge: University Press.
• Goode, R. (2011). Principles of Corporate Insolvency Law. London: Sweet & Maxwell.
• Hart, O. (1999). Different Approaches to Bankruptcy. Harvard Institute of Economic Research Paper No. 1903.
• Henderson, M. T. (2007). Paying CEOs in Bankruptcy: Executive Compensation when Agency Costs are Low. Northwestern University Law Review, 101(1), 1543–1619.
• International Monetary Fund. (1999). Orderly & Effective Insolvency Procedures, Key Issues. Legal Department, International Monetary Fund.
• Jackson, T. H. (1982). Bankruptcy, Non-Bankruptcy Entitlements and the Creditors’ Bargain. Yale Law Journal, 91(5), 857–907.[Crossref]
• Jackson, T. H. (1985). Translating Assets and Liabilities to the Bankruptcy Forum. Journal of Legal Studies, 14(1), 73–114.[Crossref]
• Jackson, T. H. (2001). The logic and limits of Bankruptcy law. Washington D.C.: Beard Books.
• Kennedy, D. S., Bailey, J. S., Clift, R. S. (2000). The Involuntary Bankruptcy Process: A Study of the Relevant Statutory and Procedural Provisions and Related Matters. University of Memphis Law Review, 31, 3–59.
• Kramer, R., Peter, F. K. (2012). Insolvenzrecht, Grundkurs für Wirtschaftswissenschaftler. Wiesbaden: Gabler Verlag, Springer Fachmedien.
• Lazear, P. E. (1995). Personnel Economics. Boston: MIT Press Books.
• Listokin, Y. (2007). Paying for Performance in Bankruptcy: Why CEOs should be compensated with debt. University of Pennsylvania Law Review, 155(4), 777–832.
• Madaus, S. (2013). Reconsidering the Shareholder’s Role in Corporate Reorganisations under Insolvency Law. International Insolvency Review, 22, 106–117.
• Marinč, M., Vlahu, R. (2011). The Economics of Bank Bankruptcy Law. Berlin, Heidelberg: Springer.
• Martin, N. (2005). The Role of History and Culture in Developing Bankruptcy and Insolvency Systems: The Perils of Legal Transplantation. Boston College International and Comparative Law Review, 28(1), 1–77.
• McCormack, G. (2007). Control and Corporate Rescue: An Anglo-American Evaluation. The International and Comparative Law Quarterly, 56(3), 515–551.
• McCormack, G. (2009). Apples and Oranges? Corporate Rescue and Functional Convergence in the US and UK. International Insolvency Review, 18(2), 109–134.
• Moss, G. (1998). Chapter 11: An English Lawyer’s Critique. Insolvency Intelligence, 11, 17–21.
• Omar, P. (2014). A Reform in Search of a Purpose: French Insolvency Law Changes (Again!). International Insolvency Review, 23(3), 201–220.
• Payne, J. (2014). Debt Restructuring in English Law: Lessons from the US and the Need for Reform. University of Oxford, Legal Research Paper Series, Paper No. 89/2013.
• Picker, R. C. (1992). Voluntary Petitions and the Creditors’ Bargain. University of Cincinnati Law Review, 61(2), 519–542.
• Posner, R.A. (2011). Economic analysis of law (8th edition). Austin, Texas; Wolters Kluwer, Law & Business.
• Rasmussen, R. K., Skeel, D.A. (1995). The Economic Analysis of Corporate Insolvency Law. American Insolvency Law Review, 3, 85–115.
• Shavell, S. (2004). Foundations of Economic Analysis of Law. Cambridge, Massachusetts: The Belknap Press of Harvard University Press.
• Shu-Acquaye, F. (2011). American Corporate Law: Directors’ fiduciary Duties and Liability During Solvency, Insolvency and Bankruptcy in Public Corporations. University Of Puerto Rico Business Law Journal, 2(1), 2011, 1–20.
• Skeel, D.A. (2003). The Past, Present and Future of Debtor-in-Possession Financing. Cardozo Law Review, 25(5), 1905–1934.
• Skeel, D.A. (2003). Creditors’ Ball, The “New” New Corporate Governance in Chapter 11. University of Pennsylvania Law Review, 152(2), 917–951.[Crossref]
• Stiglitz, J. E. (2001). Bankruptcy Laws, Basic Economic Principles. In Claessens et al (Ed.). Resolution of Financial Distress, An International Perspective on the Design of Insolvency Laws (1–24). Washington D.C.: The World Bank.
• Sorensen, K. E. (2013). Disqualifying Directors in the EU. Nordic & European Company Law Working Paper Series, 10–43.
• Tabb, C. J. (1997). The Law of Bankruptcy. Westbury, New York: The Foundation Press.
• Warren, E. (1993). Bankruptcy Policymaking in an Imperfect World. Michigan Law Review, 92(2), 336–387.[Crossref]
• Warren, E., Westbrook, W. (2001). The Law of Debtors and Creditors (Fourth Edition). Gaithersburg: Aspen Law & Business.
• Wathne, K. H., Heide, J. B. (2000). Opportunism in Interfirm Relationships: Forms, Outcomes, and Solutions. Journal of Marketing, 64(4), 36–51.[Crossref]
• Weber, R. (2006). Can the Sauvegarde Reform Save French Bankruptcy Law: A Comparative Look at Chapter 11 and French Bankruptcy Law from an Agency Cost Perspective Note. Michigan Journal of International Law, 27, 257–302.
• Westbrook, W., Booth, C. D., Paulus, C. G., Rajak, H. (2010). A global view of Business Insolvency Systems. Washington, D.C.: The World Bank.
• White, M. J. (2001). Bankruptcy Procedure in Countries Undergoing Financial Crises. In Claessens et al (Ed.). Resolution of Financial Distress, An International Perspective on the Design of Insolvency Laws (25–43). Washington D.C.: The World Bank.
• White, M. J. (2005). Economic Analysis of Corporate and Personal Bankruptcy Law. National Bureau of Economic Research (NBER) Working Paper 11536.
• Wittman, A. D. (1984). Liability for Harm or Restitution for Benefit? Journal of Legal Studies, 13(1), 57–80.[Crossref]
• Zajc, K., Cepec, J. (2012). Globalna finančna kriza in novele Zakona o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju. Podjetje in Delo, 38(6/7), 1290–1303.
• Zweigert, K., Kötz, H. (2004). An Introduction to Comparative Law. New York: Oxford University Press.

Identifiers

DOI

10.1515/danb-2016-0005