Working Paper #2009-07 – Government Intervention to Prevent Bankruptcy: The Effect of Blind-Bidding Laws on Movie Theaters

Department of Economics

University of Delaware

Working Paper #2009-07

Government Intervention to Prevent Bankruptcy: The Effec of Blind-Bidding Laws on Movie Theatres

ABSTRACT

In the 1970s motion picture studios used blind bidding and non-refundable guarantees to reduce the risks of producing large budget films. However, theater owners claimed that blind bidding and guarantees shifted the risk to them and increased the likelihood of bankruptcy. In response to lobbying by theater owners, twenty-four states passed laws banning blind bidding between 1978 and 1984, while seven states also banned non-refundable guarantees. We find that the laws were not only ineffective in keeping theater owners from exiting the market; they may have been detrimental to theater owners converting to multiplexes at that time.

JEL Codes: L1, L2

Keywords: Bankruptcy, Blind Bidding, Vertical Contractual Relationships, Government Intervention