Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure

Authors

James W. Bowers, Louisiana State University Law CenterFollow

Abstract

Part I briefly examines the conventional explanation for bankruptcy's defining characteristic, its default distributional rule. It concludes that the conventional explanation is insufficiently informative for us to tell whether the Bankruptcy Code (Code) is actually working or not. Part II argues that the only existing systematic attempt to explain bankruptcy law, the so-called "Creditors' Bargain" Theory, is inadequate for two reasons. First, the predictions it generates are belied by real-world events. Second, it is mistaken on theoretical grounds, primarily because it ignores how debtors are likely to manage their assets. Part III presents the Murphian theory of failing behavior, the hypothesis that the debtors are efficient liquidators of their own declining affairs. This Part shows how both solvent and insolvent debtors faced with losses can be expected to manage their assets in optimal ways without bankruptcy legislation. Part IV summarizes the conclusions drawn from elementary Murphian theory and suggests another weakness in the Creditors' Bargain model: it disregards the benefits of having debtors distribute their own assets. From the existing theory, it projects reasons for believing that optimal distributions are likely to occur without the intervention of bankruptcy. It ends by speculating on why we are tempted to adopt and then tinker with bankruptcy law, even in the face of the O'Conner Construct ("You can't fine-tune a mess").

Recommended Citation

James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 Mich. L. Rev. 2097 (1990).
Available at: https://repository.law.umich.edu/mlr/vol88/iss7/4