Theory and Reality in Bankruptcy: The Spherical Chicken

Abstract

In his paper entitled Financial Markets, Default, and Bankruptcy: Role of State Dean William H. Meckling used some principles widely accepted by economists as analytical framework within which to clarify issues, identify more precisely role which bankruptcy plays, and assess social consequences of alternative legal structures for bankruptcy.' Meckling asserts that the evidence and theory strongly support proposition that any increase (or decrease) in lending costs brought about by changes in bankruptcy laws will in long run be passed along to borrowers or potential borrowers.2 These propositions are restated in more economic terms: [T]he supply of funds available for any class of credit is virtually perfectly elastic at an interest rate determined by costs of lending in that market....3 are defined to include alternative lending opportunities, as well as risks and various expenses of business operation in consumer lending.4 Costs are, to some extent, result of anticipated and actual risks. risks include default in form of a petition in bankruptcy. price of money is a direct function of these costs to sellers of money. As Meckling puts it, The higher these costs, more it will cost individuals to borrow.5