DP2488 Capture of Bankruptcy: Theory and Evidence from Russia

Author(s): Ariane Lambert-Mogiliansky , Konstantin Sonin , Ekaterina Zhuravskaya

Publication Date: June 2000

Keyword(s): Bankruptcy , Capture , Incentives , Regional Governments , Restructuring , Russia , Transition

JEL(s): D23 , G33 , H11 , H77

Programme Areas: Transition Economics

Link to this Page: www.cepr.org/pubs/dps/DP2488.asp

Laws that work well in a rule-of-law country may produce unexpected outcomes in a corrupt environment. We argue that the legal system in Russia is faulted by the capture of regional divisions of arbitrage courts. We analyse the consequences of this for the efficiency of Russian bankruptcy law. Using a theoretical model and a systematic analysis of available evidence, we conclude the following: First, the governors in alliance with managers of large regional enterprises use bankruptcy institution as a mechanism for effective expropriation of the federal government and the outside investors. And second, the bankruptcy law does not create pressure on managers to restructure; instead, it may even prevent restructuring.