What Drives the Optimal Bankruptcy Law Design?

In this paper the authors discuss the factors that interact in the design of an optimal bankruptcy law. The authors focus on issues that are often overlooked in both the policy debate and in the academic research on bankruptcy. After answering the question why a bankruptcy law is needed at all, the authors discuss the criteria of ex ante vs. ex post efficiency. The second factor the authors deal with is institutional quality, namely the quality of the judiciary. They argue that, considering factors such as imprudence and corruption, it may be optimal to resign on the first-best solution that could be theoretically achievable with a benevolent and omniscient judiciary. The optimal bankruptcy law would then contain more simple and automatic rules and less space for judicial (i.e., individual) discretion. The authors´ concluding comment concerns the lack of empirical research in the bankruptcy area in the Czech Republic and the essential need for such research.