A noncooperative approach to bankruptcy problems with an endogenous estate
Please cite this item using this persistent URLhttp://hdl.handle.net/11693/12518
Annals of Operations Research
- Department of Economics 
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 (risky asset) and depositing money into a savings account (risk-free asset). Bankruptcy is possible 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 profits by choosing a bankruptcy rule. Our agents are differentiated by their incomes. We consider three most prominent bankruptcy rules in our base model: the proportional rule, the constrained equal awards rule and the constrained equal losses rule. We show that only the proportional rule is a part of any pure strategy subgame perfect Nash equilibrium. This result is robust to changes in income distribution in the economy and can be extended to a larger set of bankruptcy rules and multiple types. However, extension to multiple company framework with competition leads to equilibria where the noncooperative support for the proportional rule disappears.
Karagözoğlu, E. (2014). A noncooperative approach to bankruptcy problems with an endogenous estate. Annals of Operations Research, 217(1), 299-318.