Saturday, December 03, 2005

Bankruptcy

The problem with corporate bankruptcy is that, once a company files for bankruptcy, it is shielded from its creditors and can come back stronger than before. Thus a company does not want to drive its competitors out of business, because if it does, it's only hurting itself. Rather, the most competitive companies seek to keep their competitors, small and inefficient, but alive. Bankruptcy law, therefore, weakens the creative destruction of the free market.

The fallout of a company completely collapsing--all of the obligations that it has to its various stakeholders--keeps us from wanting a company to die, but the inefficiencies of keeping it alive hurt us all. Thus I propose that, when a company files for bankruptcy, its competitors have the option of buying it for the cost of its liabilities. This would keep the stakeholders out of hot water, and still allow us to kill companies who have served their purpose.

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