An experimental study of the investment implications of bankruptcy laws

We use an experimental design to analyze and compare actual investor behavior under two well-known allocation rules proposed by the theoretical literature on bankruptcy problems: Equal Losses Rule (EL) and Proportional Rule (PRO). More specically, we experimentally test the following hypotheses, forwarded by the theoretical work of Kibris and Kibris (2013): (i) total investment is higher under EL than under PRO; (ii) under both rules, a decrease in the rm's probability of bankruptcy (i.e. an increase in its success rate) serves to increase both individual and total investment levels; (iii) under both rules, more risk averse agents choose lower investment levels; (iv) under EL, agents with more risk averse partners invest more, (v) under PRO, an agent's investment choices are independent of his partner's risk attitude. Our findings support all hypotheses except (iv). We find that a switch from PRO to EL or an increase in the success rate induces higher investment choices and that more risk averse subjects invest less in general. We do not observe a signicant effect of partner's risk aversion on a subject's investment choices. Finally, we also find that the bankruptcy rule in play has a signicant effect on a subject's likelihood of choosing an extreme (that is, zero or full) investment level.