An Economic Analysis of Bankruptcy Laws and Financial Institutions in Reforming Socialist Economies

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Economic reform in Eastern Europe and the Soviet Union has attracted great attention in the past year. Reforming governments have sought advice about how to lay the foundations for the operation of capitalist market economies. A necessary precondition for the proper functioning of capital markets is implementation of clear and enforceable definitions of property rights, of which bankruptcy laws are an important component. It is precisely these rights and laws that are currently lacking in Eastern Europe. Although previous researchers have produced legal or historical comparative studies of bankruptcy laws or financial institutions, no modern analysis or theory exists for the transition from socialism to capitalism. This research examines the problems of design and implementation of bankruptcy laws and the link between bankruptcy statutes and capital markets during the transition from centrally planning and largely state-owned economies to market-oriented economies with private ownership. The study is comparative, not only among the several East European states themselves, but also regarding capitalist economies with longstanding bankruptcy systems. The research methodology employs a combination of formal, mathematical modeling, economic analysis of legal and financial developments, and gathering of data regarding design and enforcement of bankruptcy laws in these two sets of economies. This research should enhance our understanding of the role and functions of law and of economic behavior under conditions of rapid social transformation. It will contribute to the development of aspects of the theory of financial reform necessary for the move from nonmarket to market economic systems. Also, it is likely to advance knowledge about the economics of law and the optimal strategies and policy options for legislative reform regarding key economic laws such as bankruptcy.