The Economics of Bankrupcy, Reorganisation and Liquidation: Lessons for East European Transitional Economies

Introduction

Entry and exit are fundamental underpinnings of the competitive process. They ensure that a sufficient number of firms remain in an industry, and produce efficiently, in order to satisfy the market demand at a competitive price. Moreover, entry and exit need not be in the form of firms actually appearing on, or departing from, the industry scene. They may well be in the form of an increase or a reduction in the volume of activities and the volume of resources engaged in the production process, or a change in the type of activity. The competitive process results in the flow of resources into efficient units and out of inefficient ones - a process which may also be interpreted as 'entry' and 'exit'. A contraction of demand for some products, for example, should lead to either the exit of resources from some of the production units, or the closure of some plants, in an industry. With modern large scale corporations the exit process is, most often, characterised by a reorganisation of resources- their withdrawal from some, and flow into other, activities. In this sense market economies can be characterissed by an almost permanent flow of resources out of old, inefficient activities and into new ones. Only in a small number of cases, and generally rarely, is the exit of resources associated with financial distress, default on debt, insolvency and ultimately bankruptcy and the disappearance of the firm.