Document Type
Article
Publication Date
1999
Abstract
In Bankruptcy Contracting Reviewed, Alan Schwartz purports to restate and defend the bankruptcy contracting model he presented in A Contract Theory Approach to Business Bankruptcy. What he in fact does is abandon key assumptions of the original model and substitute new ones. The resulting new model is driven by reputational constraints neither present nor possible in the original model. Yet it works no better than the original. The linchpin of Schwartz's response is his insistence that his original model contained an unstated assumption prohibiting debtor firms from lying. In the context of Schwartz's model, the effect of the new assumption is to bar the debtor from strategic behavior at the contracting stage--an implausibility in the context of bankruptcy. To fit this new assumption to his original model, Schwartz had to make new supporting assumptions that he ultimately could not reconcile with the original model. In addition, as Schwartz has filled in more of the details of his model, other problems of inconsistency and incompleteness have come into sharper focus. As will be apparent, Schwartz has not yet demonstrated the feasibility of bankruptcy contracting in the real world or in his revised model.
Recommended Citation
Lynn M. LoPucki, Bankruptcy Contracting Revised: A Reply to Alan Schwartz's New Model, 109 Yale L.J. 365 (1999)