Abstract 

We propose a unified framework to explain the key problems underlying corporate bankruptcy law. Creditor rights take two primary forms: the right to take assets from the debtor and the right to block asset transfers from the debtor to third parties. Taking and blocking rights control agency problems, such as value-diverting transfers by management. But in financial distress, one creditor’s rights can impose costs on the others. Multiple taking rights create the well-known commons problem: creditors can race to the debtor to collect, causing a valuable firm to be liquidated. Bankruptcy law can stay the creditor race, but a stay creates one of two alternative problems. Replacing taking rights with blocking rights creates an anticommons problem of holdout and costly delay. Holdout problems can be mitigated by removing blocking rights for some creditors. But creditors who can neither take nor block are vulnerable to the very agency problems their contracts try to prevent. We call these three problems—commons, anticommons, and agency—bankruptcy’s trilemma: the law cannot solve all three at once. We show how most of bankruptcy law’s features target at least one of the three problems. U.S. law’s back-and-forth evolution over time reveals the inevitable tension between them.

Paper can be downloaded here.

Practicalities

This event will be a hybrid event. The seminar will take place in Roeterseiland campus (REC) building M, room number M1.01, and will also be streamed online via Zoom.  

About the speaker 

Kenneth Ayotte is the Robert L. Bridges Professor of Law at U.C. Berkeley School of Law. His main research interests are in corporate bankruptcy and law and economics. Ayotte has received awards for teaching excellence in a business school (Columbia) and a law school (UC Berkeley). He is particularly interested in the effects of complexity in corporate structure and contracting, and the effects of creditor control in corporate reorganization.

About ACLE

The Amsterdam Center for Law and Economics (ACLE) is a joint initiative of the Faculty of Economics and Business and the Faculty of Law at the University of Amsterdam. The objective of the ACLE is to promote high-quality interdisciplinary research at the intersection between law and economics.

We gratefully acknowledge the generous funding by the Amsterdam University Fund for this seminar.