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Divide and choose: An informationally robust strategic approach to bankruptcy problems

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  • Li, Jiawen
  • Ju, Yuan

Abstract

This paper proposes a simple and general strategic approach for analyzing bankruptcy problems. We construct three strategic bargaining games and show that they yield unique subgame perfect equilibrium (SPE) outcomes that coincide with the allocations given by the three prominent solution concepts, the constrained equal awards rule, the constrained equal losses rule and the Talmud rule, respectively. We also discuss the robustness of the result in the presence of certain incomplete information. The approach can be readily extended to study alternative solutions for bankruptcy problems or other settings such as surplus sharing problems, and is further enriched by considering a voting stage. Central to all these bargaining protocols is an extended and context-fitting “divide-and-choose” mechanism.

Suggested Citation

  • Li, Jiawen & Ju, Yuan, 2023. "Divide and choose: An informationally robust strategic approach to bankruptcy problems," Journal of Mathematical Economics, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:mateco:v:107:y:2023:i:c:s0304406823000551
    DOI: 10.1016/j.jmateco.2023.102862
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    References listed on IDEAS

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