Closing a Business

For years, this topic has been the least active in Doing Business. No more. The recent crisis has brought many businesses to bankruptcy, with countless more to come. It is a good time to be a bankruptcy lawyer.

How timely then that the background paper to Closing a Business has just been published in the Journal of Political Economy. The paper, Debt Enforcement Around the World, is written by Simeon Djankov, Oliver Hart, Caralee McLiesh, andAndrei Shleifer.

The main point of the paper? That rich and common law countries have more efficient bankruptcy procedures; and that the availability of floating charge finance and the absence of appeals during the procedure (as opposed to before the procedure has started) make for more expedient bankruptcy. That rich countries have better bankruptcy is especially heart-warming: they will need it badly in the coming year or two. According to the latest forecast, OECD economies are going to shrink by 1 to 2 percentage points in 2009 alone. This means lots of exit.

The analysis in the paper is already used by other researchers. For example, in a recent paper, Levon Barseghyan (Cornell) shows that inefficient bankruptcy regimes cause more macro volatility as factors of production do not move freely across firms and sectors. Debt Enforcement Around the World is the sixth background paper to Doing Business published in a top economics journal. Another one - Trading on Time  - is forthcoming in the Review of Economics and Statistics. The tax paper is hopefully soon to appear in the American Economic Journal: Macro. That leaves two to go.