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After the FloodHow the Great Recession Changed Economic Thought$
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Edward L. Glaeser, Tano Santos, and E. Glen Weyl

Print publication date: 2017

Print ISBN-13: 9780226443546

Published to Chicago Scholarship Online: September 2017

DOI: 10.7208/chicago/9780226443683.001.0001

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Bankruptcy Laws and Collateral Regulation: Reflections after the Crisis

Bankruptcy Laws and Collateral Regulation: Reflections after the Crisis

(p.123) Chapter Five Bankruptcy Laws and Collateral Regulation: Reflections after the Crisis
After the Flood

Aloisio Araujo

Rafael Ferreira

Bruno Funchal

University of Chicago Press

This chapter revisits two topics in light of the events that led to and followed the 2008 financial crisis: bankruptcy laws and collateral regulation. We start by discussing the relation between the level of exemptions in bankruptcy codes and the rate of default. Our discussion is based on a GEI model of bankruptcy that allows for different degrees of debtor punishment and concludes, in line with well-known results, that an intermediate level of punishment induces more risk-sharing and increases welfare. We then move to corporate bankruptcy, reviewing circumstances when it pays to be lenient towards defaulting debtors. In summary, when capital markets fail to promote ex post efficiency, deviations from a pro-creditor distribution rule may increase welfare. Finally, we move to margin requirements. We revisit an interesting result in this literature showing that when collateral is scarce, restricting subprime loans — a much debated idea in the aftermath of the crisis — does not lead to Pareto improvement.

Keywords:   bankruptcy laws, collateral regulation, credit markets, default

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