Ryota Ogaki

Job Market Paper

Information Friction in Corporate Debt Restructuring and Macroeconomic Recovery

Abstract:  I study the impact of changes in the efficiency of the U.S. corporate bankruptcy laws in the economic recovery following a recession. To do so, I develop a general equilibrium heterogeneous firms model with endogenous bankruptcy choice and private information about firms' permanent productivity levels. According to current U.S. bankruptcy law, firms can choose from two bankruptcy options: Chapter 11 reorganization or Chapter 7 liquidation. In the model, private information hinders the screening of firms' permanent productivity, and firms with low permanent productivity can be more likely to be reorganized and continue operations after filing bankruptcy, compared to the case with perfect information. Combined with private information, Chapter 11 reorganization increases the fraction of firms with low permanent productivity. As a result, this channel reduces aggregate output by 1.9% in the partial equilibrium. However, the lower equilibrium wage reduces the bankruptcy rate, increases firms' production, and restores the declined aggregate output in the general equilibrium. Lastly, as a source of business cycle fluctuations, I consider uncertainty shocks that raise volatility of firms' idiosyncratic productivity. With private information, this shock makes lenders more uncertain about permanent productivity and causes a prolonged recession if firms are allowed to file Chapter 11 when filing bankruptcy.