. The bankruptcy code is a "primitive creditor system" and financial distress leads to an arbitration between private … agreement and costly formal bankruptcy. We consider a standard debt contract between a bank and a small firm, both risk … show that costly formal bankruptcies may occur at equilibrium and the internalization of bankruptcy costs is impossible …

general equilibrium model. Binding ceilings on loan rates reduce the probability of bankruptcy. Lower bankruptcy rates result … in lower bankruptcy and liquidation costs. The authors state conditions under which the resources freed by this cost …