Coase-Sandor Working Paper Series in Law and Economics

Publication Date

2005

Publication Title

Law & Economics Working Papers

Abstract

This empirical study suggests that, far from ensuring assets are put to their best use, Chapter 11 encourages entrepreneurs to remain too long with failed businesses before trying to start new ones. Small entrepreneurs open and close a number of businesses over the course of their careers as they search for the business (or employer) that offers the best match with their skills. Chapter 11 delays this matching process and, over this dimension, differs little from rent control and other government policies that encourage socially wasteful lock-in of scarce resources. These costs may not be large, as bankruptcy judges are aware of and guard against them. At the same time, however, few benefits offset these costs. The typical Chapter 11 is a small business that has few, if any, specialized assets. It is organized around the owner-operator's human capital and can be (and usually is) reassembled by the owner at low cost. Other than delay, the outcome of a Chapter 11 case—reorganization or liquidation—has little bearing on a small entrepreneur's career.

Number

236

Included in

Law Commons

Share

COinS