The resolution of bankruptcy by auction: allocating the residual right of design

In this paper, we examine the value of the right to choose the method of sa le of corporate assets. We show that this right is valuable, and that its v alue comes from recognizing conflicting incentives of claimants at the time of sale. As with risky projects, senior and junior claimants are shown to have distinct preferences on a set of common auction procedures. They also differ on the issue of allocation of resources towards attracting bidders f or the auction. As a consequence, the optimal allocation of the design righ t must depend on circumstances prevailing at the time of the sale. While, i n general, selling the firm by auction does not guarantee the use of optima l selling arrangements, a suitable allocation of design rights may help mit igate inefficiency problems significantly. (C) 1999 Elsevier Science S.A. A ll rights reserved.