We introduce a new class of bankruptcy problems in which the value of the estate is endogenous and depends on agents'' investment decisions. There are two investment alternatives: investing in a company and becoming a shareholder (risky asset) and depositing money into a bank (risk-free asset). Bankruptcy is a possible event only for the risky asset. We define a game between agents each of which aims to maximize his expected payoff by choosing an investment alternative and a company management which aims to maximize the investment in the company by choosing a bankruptcy rule. There are two types of agents in our model, who are differentiated by their incomes. We, first, consider three well-known bankruptcy rules: the proportional rule, the constrained equal awards rule and the constrained equal losses rule. We show that there always exists a pure strategy subgame perfect Nash equilibrium, which involves the proportional rule. This result is independent of the income distribution in the economy and holds even under one-sided uncertainty on the income distribution. We also show that our results can be extended to a larger set of rules containing the Talmud rule along with other rules that belong to the TAL-family. Our results provide, at least, a partial explanation from a strategic point of view for the popular use of the proportional rule in allocating bankrupt companies'' assets to shareholders.
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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number
031.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Moulin, Herve, 2002.
"Axiomatic cost and surplus sharing,"
Handbook of Social Choice and Welfare,
in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 6, pages 289-357
Elsevier.
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