Berkeley Program in Law and Economics

There is no international bankruptcy law, but only the national bankruptcy laws of various states. The failure of a multinational firm therefore raises difficult questions of conflict and cooperation among national bankruptcy regimes. Theorists have proposed various reforms to the uncoordinated territorial approach that most states pursue when a multinational firm suffers financial distress. Among these reform proposals, universalism has long been the dominant idea. Under universalism, the bankruptcy regime of the debtor firm’s home country would govern, and that regime would have extraterritorial reach to treat all of the debtor’s assets and claimants worldwide.

Despite its conceptual dominance, universalism has yet to find vindication in any concrete policy enactments. No universalist arrangements exist. While recent challenges to universalism have emerged, the current lively debate over universalism and rival proposals focuses almost exclusively on their comparative efficiencies. This article provides an entirely new perspective. Applying insights from elementary game theory and international relations theory, I show that universalism is politically implausible. Even for states interested in establishing universalist arrangements, they will be unable to do so. They will find themselves caught in a prisoners’ dilemma with no ready solution. I conclude therefore that universalism holds only dubious promise as a prescription for international bankruptcy cooperation.