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American Law and Economics Review 2005 7(2):403-438; doi:10.1093/aler/ahi012
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Right arrow G33 - Bankruptcy; Liquidation
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© The Author 2005. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org

Optimal Trust Design in Mass Tort Bankruptcy

Kenneth Ayotte

Columbia Business School

Yair Listokin

Yale Law School

Send correspondence to: Kenneth Ayotte, Columbia Business School, 3022 Broadway Uris 418A, New York, NY 10027; E-mail: ka2051{at}columbia.edu.

Many firms have filed for bankruptcy to manage mass tort liabilities, most notably asbestos producers. We model a bankruptcy procedure that optimally balances the liquidity needs of present claimants and an uncertain number of future claimants. We find that future claimants should receive greater awards in expectation than present claimants as compensation for bearing greater future claims risk. We also find that allocating more value to contractual creditors in bankruptcy makes an earlier filing more likely, which may increase overall welfare. Optimal risk-sharing implies that creditors should receive equity in a trust fund, with tort claimants receiving senior debtlike securities.


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