| Popis: |
We model the optimal resolution of insolvent firms in general equilibrium. Absent externalities, the optimal corporate-insolvency system encourages lending by letting banks assign liquidations ex-post. We show that a social planner optimally intervenes in such a system during a crisis because of two pecuniary externalities. First, liquidation waves create fire-sale discounts, motivating a subsidy for liquidation-preventing loans to insolvent firms. However, a loan-price externality arises when collateral-constrained banks allocate scarce capital to averting liquidations rather than bolstering healthier firms, motivating a subsidy for liquidating insolvent firms. Efficient intervention can thus encourage or discourage liquidation, depending on the crisis. Our model sheds light on recent crisis-motivated policy proposals. |
