We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the expertise of judges, and the quality of contract enforcement. We analyze a model in which a judicially-in ‡uenced bankruptcy process can enhance the e¢ ciency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on ...rm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment, and show that

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... he optimal degree of "creditor-friendliness" in the bankruptcy code increases as judicial ability to recognize ...rm quality falls and as the quality of contract enforcement deteriorates. Our model contributes to the existing bankruptcy law design literature in demonstrating that a "debtor-friendly" law that focuses on preserving going-concern value, such as U.S. Chapter 11, requires judicial expertise to be e¤ective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. Our model is also able to explain cross-country patterns in the content and usage of bankruptcy laws around the world as reported in existing empirical research.