How the design of bankruptcy procedures impacts macroeconomic and employment outcomes in the post-Covid recovery period: lessons from previous crises

We propose to investigate how the design of bankruptcy procedures impacts macroeconomic outcomes, and whether the design should be different in normal times and during times of economic distress. The Covid-19 crisis provides motivation for our proposed research. Government assistance has allowed some businesses to cover their operating costs, despite declining revenues. Nonetheless, the debt of these businesses continues to accumulate and as the crisis persists this may force businesses into bankruptcy. In the post-Covid recovery phase, some of these businesses will have permanently low revenues and will need to close. The majority of them, however, will be viable, and a way must be found to bring their debt down from distress levels. Renegotiating the debt of distressed yet viable businesses is the subject of bankruptcy procedures. Yet, standard procedures are likely to be of little help during the Covid-19 recovery. This is because the procedures are lengthy and available in practice only to the largest firms. The crisis threatens the survival of a large number of small and medium firms as well. If these firms go bankrupt at a wide scale, the crisis will deepen, and there will be large knock-on effects. In Balloch et al (2020) we propose a revised bankruptcy procedure, which includes an automatic write-down on government claims on a firm in exchange for write-downs by the firm's private creditors. We propose to build on this work and investigate in more depth the interplay between bankruptcy procedures and the macroeconomy. We plan to study this issue both theoretically and empirically.