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Bankruptcy Reforms When Workers Extract Rents

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  • Alessandro Peri

    (University of Colorado Boulder)

Abstract

Firms file for bankruptcy reorganization (Chapter 11) not only to restructure debt but also to restructure labor contracts. Starting from this observation, I build a theory where shareholders weigh the cost of restructuring labor contracts against their claims on the going-concern value of the firm. In this environment, pro-creditor bankruptcy reforms face a trade-off. Upon successful reorganization, creditors recover more at the expenses of the other stake-holders: shareholders get a smaller share of the firm’s value, have less incentives to restructure labor contracts, making more likely that reorganizations fail and firms get inefficiently liquidated. As a result, expected recovery values can actually fall, increasing the cost of debt. I characterize this trade-off in a static model and show analytically that the optimal level of creditor rights decreases with the bargaining power of the workers. I test the positive implications of the theory in the U.S. data by exploiting a shift towards a more creditor-friendly Chapter 11 in 2001 and heterogeneity in right-to-work (RTW) labor laws. I estimate a firm dynamic model to the pre-2001 period, and gauge a significant asymmetric effect of the shift in the creditor rights on RTW vis-a-vis non-RTW region.

Suggested Citation

  • Alessandro Peri, 2017. "Bankruptcy Reforms When Workers Extract Rents," 2017 Meeting Papers 776, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:776
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    Cited by:

    1. Dean Corbae & Pablo D’Erasmo, 2021. "Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics [Does Industry-wide distress Affect Defaulted Firms? Evidence from Creditor Recoveries]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2239-2274.

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