We examine the effectiveness of bankruptcy institutions at promoting socially efficient allocation of resources. Under the Slovenian simplified reorganization procedure, firms with rejected reorganization proposals are not automatically liquidated. This unique institutional feature facilitates an estimation of the extent of different types of filtering failures. Based on an ex-post conceptualization of firm viability, Type I errors (the acceptance of plans by non-viable firms) are more likely than Type II errors (the rejection of plans by viable firms) and the overall incidence of filtering failure is 27%. Based on an ex-ante conceptualization of firm viability, any given reduction in Type II errors would give rise to three times as many Type I errors. We contextualize our findings in the light of prior results in the literature, alternative mechanisms for insolvency resolution, and related bankruptcy reorganization schemes internationally where courts are awarded a comparatively more prominent role.

This paper replies to Hodgson (2019), which responds to my analysis and critique in O'Donnell (2018). My present aim is clarification of our respective positions, our agreements and disagreements, and their underlying causes. To this end, I elaborate further on the logic underpinning my initial paper, comment on several (not all) key points in Hodgson's response, and conclude with the matter of our different agendas. Space limitations preclude fuller discussion and encourage concise expression.