Roger L. Faith

Some Effects of the Bankruptcy Reform Act of 1978

THE use of formal bankruptcy by private and corporate debtors increased markedly-well over 100 percent-in the last decade.1 Several writers in the financial media claimed this dramatic increase to be the result of radically incorrect expectations and the subsequent accumulation of short-term, high-interest debt in the late 1970s combined with the high real interest rates of the 1980s.2 Others have argued that an emerging acceptability of bankruptcy-both as an area of practice for lawyers and as a solution to financial problems for consumers-has strongly contributed to the observed increase in filings.3 Another potential explanation of the bankruptcy explosion lies with institutional change. In October 1978 Congress changed the legal rules governing personal bankruptcy; specifically, it increased the dollar amounts of certain physical assets and cash that debtors can withhold from creditors on filing for bankruptcy. Our aim in this paper is twofold: first, to shed some light on the causes of the dramatic increase in bankruptcy filings and, second, to examine the relation between the institutional change and the ratio of secured to unsecured debt. Particular emphasis is placed on the Bankruptcy Reform Act of October 1978 (BRA).4 The Reform Act was intended to modernize

Managerial Rents and Outside Recruitment in the Coasian Firm

In the corporation, decision making about the use of capital by managers and risk taking by the owners of capital are specialized activities. Various institutional mechanisms have been analyzed as forces disciplining the opportunistic behavior of management under these conditions. We maintain that no single mechanism, such as wage revision in the managerial labor market or an internal device that relies on influencing incentives by making executives residual claimants in the firm, is sufficient to solve problems of managerial incentives. Instead, the margins of several control devices are extended simultaneously to maximize the value of the firm, net of the cost of control. In this context we will emphasize one means of managerial control which has not been fully analyzed to date—the impact of outside hiring on the behavior of incumbent managers.

Right-to-work and union compensation structure

There are many reasons to expect that right-to-work legislation should affect unionism, independently of whether or not such legislation reflects the sentiments of the electorate. The strongest reason is that employees protected by right-to-work legislation can quit a union without quitting their job. This should make collective job actions more difficult and prompt local union leaders to strive more for consensus among members. If so, unions in right-to-work states should negotiate less pay for seniority than do unions in non-right-to-work states. PSID wage data generally confirm this prediction.

Local fiscal crises and intergovernmental grants: A suggested hypothesis

This paper seeks to relate the secular increase in intergovernmental grants to localities and the increasing appearance of actual, or potential, local fiscal crises. The hypothesis is that in a world of interpersonal benevolence both within and across jurisdictional boundaries where intergovernmental grants are made on the basis of need, individual governmental units rationally seek to reduce their production of services in order to obtain more increased fiscal aid. This may be accomplished, for example, by a locality overspending relative to its revenue resulting in future budget deficits and fiscal crises. The subsequent cutback in services and public employment then becomes the basis for increased aid. Such strategic behavior generates a non-optimal allocation of resources. Optimality can be restored by requiring that any increase in aid based on a localitys ‘need’ be divided equally over all localities. This policy also introduces an element of fiscal symmetry at the federal level.

Inheritance, Equal Division and Rent Seeking

We examine bequest-sharing rules where wasteful competition for bequests is possible by children. We show that equal division minimizes rent-seeking expenditures by siblings. Finally, we employ a theory of rational social norms in order to discuss the evolution of bequest norms in the Middle Ages from primogeniture to partible inheritances in some parts of Western Europe.

Bureaucratic Tenure and Economic Performance in Centrally Planned Economies

Murrell and Olson (1991) set forth the hypothesis that in centrally planned economies economic interests over time become fragmented as bureaus become more autonomous and form into narrowly-based distributional coalitions. As a consequence, the national leaders encompassing interest in economic growth becomes compromised and growth begins to slow. This paper provides the first direct test of the hypothesis that growing bureaucratic autonomy results in declining economic growth in centrally planned economies.

Optimal Labour Contracts and Involuntary Unemployment under Costly and Imperfect Monitoring

This paper provides an explanation for the concurrence of rigid wages and involuntary unemployment. The authors consider cases in which a firm monitors its workers but at some cost. A key assumption in the model is that the firm cannot perfectly distinguish shirkers from nonshirkers. Thus, the firm has to rely on negotiated compensation and work effort, as well as monitoring, to reduce the incentive to shirk. The authors find that rigid wages and involuntary unemployment arise simultaneously when monitoring costs are large and the effectiveness of monitoring is low. Copyright 1996 by The London School of Economics and Political Science.

Rent Seeking and Fixed-Share Pools in Government

A fixed-share pool is a given amount of resources to be divided among a given number of claimants in which a claimant’s share of the pool is fixed exogenously. Consequently, rent seeking to increase one’s share of the pool is effectively eliminated. However, if claimants have sharing rights to more than one pool, rent seeking in the form of transferring resources from a pool where one has a small share to a pool where one has a large share will generally occur. A game-theoretic analysis of this type of rent seeking is discussed and then applied to a number of governmental settings.

Lobbying and the Measurement of Conventional Welfare Cost

It is widely accepted that the welfare cost of distortionary policy has two components. The first component is the conventional welfare cost of lost economic surplus due to an inefficient allocation of resources. The second component is the rent-seeking cost associated with efforts to influence policy. If the policy in question is an excise tax, the partial equilibrium measure of conventional welfare cost is the Harberger triangle of lost consumer and producer surpluses. Partial equilibrium rent-seeking costs are measured by the amount spent to influence policy. Total welfare cost is the sum of the two measurements. While how one determines (and thus, measures) the equilibrium amount of rent-seeking is the subject of much debate and modelling, the measurement of conventional welfare cost is not controversial. 1 Furthermore, conventional welfare costs are treated as independent of the manner in which rent-seeking occurs. For example, consider the welfare cost of monopoly (see Tullock, 1967; or Posner, 1975). The portion o f the total welfare cost due to underproduction is measured by the Harberger triangle of lost surplus. Whatever the method by which monopoly rights are obtained, the benefits of rent-seeking accrue entirely to the holder of the monopoly right. Any rent-seeking expenses are treated as fixed costs with no effect on the monopolist s output decision. The form that rent-seeking takes is irrelevant to the measurement of conventional welfare cost. In other cases, the form rent-seeking takes is relevant. Consider a multi-firm industry subjected to an excise tax. If effective lobbying requires a collective lobbying effort, and if a firms share of the industrys rent-seeking expenses vary with a firms output, rent-seeking will affect the firms and industrys marginal cost functions. The impact of rent-seeking on marginal cost, if overlooked, leads to mismeasurement of conventional welfare cost and thus, the total welfare cost of the policy. Moreover, the direction of measurement error