A noncooperative approach to bankruptcy problems with an endogenous estate

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Date Issued
2014Author
Karagözoǧlu, E.
Please cite this item using this persistent URL
http://hdl.handle.net/11693/26653Journal
Annals of Operations Research
Published as
http://dx.doi.org/10.1007/s10479-014-1588-4Collections
- Research Paper [7145]
Publisher
Springer Netherlands
Abstract
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. © 2014 Springer Science+Business Media New York.