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The American Law & Economics Association Annual Meeting

posted by Angie Littwin

This weekend was the annual meeting of the American Law & Economics Association (ALEA).  It was a two-day conference at Harvard Law School, with five concurrent panels of three presenters for each time slot.  Although the topics ranged from plea bargains to family law to referees in the NBA, there was almost always a bankruptcy or contracts panel taking place.  (I knew I was on the right track because the sessions I wanted to see were all in the same room.  I got to know Pound 102 quite well.)

I saw too many presentations to recount all of them, so I’ll summarize briefly three papers I think will be of particular interest to Credit Slips readers. 

Ed Morrison (Columbia) is continuing his fascinating work on small businesses in bankruptcy.  His current finding is that a very small percentage of businesses that exited the market did so through bankruptcy, and he profiled the characteristics of the businesses that did use Chapter 11. Interestingly, though he found variables (such as the presence secured debt) that businesses who used bankruptcy shared at a significant level, many of the other businesses he studied had those same characteristics as well.  The result I found most interesting is that states with high rates of small business filings also have high rates of consumer filings.  Is this because so many small business owners in bankruptcy file consumer petitions as well?  Or because so many small businesses file in Chapters 7 and 13 that the numbers in all three chapters are really describing the same event?  Or perhaps it’s because of generally slow economies in those regions.  We hope to have more information on those questions after we get the data from the current Consumer Bankruptcy Project.

Douglas Baird (Chicago) also presented a paper on small businesses in bankruptcy.  His results provide a nice juxtaposition to Ed Morrison’s.  Even though the vast majority of small businesses that exit the market do not use bankruptcy, those that do still make up the overwhelming majority of businesses in Chapter 11.  The very smallest businesses, which represented the largest category of filers in the study, are so small that they frequently do not even have secured creditors.  Their major creditor is typically the IRS, often because the owners have taken funds from their employee payroll tax accounts, presumably in a desperate attempt to keep the business afloat.  That’s an unsettling picture, to say the least.

Michelle White (U.C., San Diego) presented on consumer bankruptcy.  She credits the tremendous rise in credit card debt for the correspondingly large rise in consumer bankruptcy filings over the past few decades, although BAPCPA has (temporarily, in my view) dislodged that relationship.  (Since BAPCPA, credit card debt continues to soar, while filings are down.  Whether they stay down remains to be seen.)  She proposed an empirical project that would distinguish between debtors who land in bankruptcy because of difficulties managing credit cards in light of cognitive biases and those who seek bankruptcy through strategic planning. 

These descriptions, of course, do not do the authors justice.  Michelle White’s paper is available through the ALEA conference site.  Ed Morrison and Doug Baird have related papers on SSRN.

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