An argument that APR violations exacerbate credit rationing problems by reducing the payment lenders receive in default states.

The author argues that runs, which are generally considered undesirable, also have a beneficial effect--improving lenders' monitoring incentives. Lenders' ability to run on the firm helps control its moral hazard problem, while the first-come, first-served aspect of asset distribution keeps...

A demonstration that violations of the absolute priority rule exacerbate credit rationing problems by reducing the payment lenders receive in default states.

An analysis showing that allowing creditors to "run" on a firm in financial distress is socially valuable, since it compensates them for monitoring the firm's condition; in contrast, strict adherence to absolute and proportionate priority rules allows lenders to free ride on the monitoring...