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On the investment implications of bankruptcy laws

Kıbrıs, Özgür and Kıbrıs, Arzu (2010) On the investment implications of bankruptcy laws. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2010/0007

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Abstract

Axiomatic analysis of bankruptcy problems reveals three major principles: (i) proportionality (PRO), (ii) equal awards (EA), and (iii) equal losses (EL). However, most real life bankruptcy procedures implement only the proportionality principle. We construct a noncooperative investment game to explore whether the explanation lies in the alternative implications of these principles on investment behavior. Our results are as follows (i) EL always induces higher total investment than PRO which in turn induces higher total investment than EA; (ii) PRO always induces higher egalitarian social welfare than both EA and EL in interior equilibria; (iii) PRO induces higher utilitarian social welfare than EL in interior equilibria but its relation to EA depends on the parameter values (however, a numerical analysis shows that on a large part of the parameter space, PRO induces higher utilitarian social welfare than EA).

Item Type:Working Paper / Technical Report
Uncontrolled Keywords:bankruptcy, noncooperative investment game, proportional, equal awards, equal losses, total investment, egalitarian social welfare, utilitarian social welfare.
Subjects:H Social Sciences > HB Economic Theory
ID Code:14704
Deposited By:Özgür Kıbrıs
Deposited On:08 Oct 2010 15:47
Last Modified:18 Oct 2010 15:28

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