Abstract
We model fundamental differences across economic systems and propose optimal bankruptcy laws. We show that creditors-debtors relationships in a given economy are affected by the ability of creditors to obtain information about fundamentals and the managers' ability to strategically use their private information. An optimal bankruptcy law utilizes creditors' information, while minimizing managers' use of strategic information. Our proposed laws for a developed bank-based system like Germany includes a creditor chapter only for a developed market-based system like the U.S.A. includes both a creditor chapter and a debtor chapter, and for an under-developed system includes both a creditor chapter and a debtor chapter that gives the manager more protection than in a market-based system.
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