Abstract
The pari passu principle of awarding claimants proportionally to their pre-insolvency claims is the most prominent principle in the law of insolvency. We report from a lab experiment designed to study whether people find this principle a fair solution to the bankruptcy problem. The experimental design generates situations where participants work and accumulate claims in firms, some of which subsequently go bankrupt. Third-party arbitrators are randomly assigned to determine how the liquidation value of the bankrupt firms should be distributed between claimants. Our main finding is that there is a striking support for the pari passu principle. We estimate a random utility model that allows for the arbitrators to differ in what they consider a fair solution to the bankruptcy problem and find that about 85% of the participants endorse the proportional rule. We also find that a nonnegligible fraction of the arbitrators follow the constrained equal losses rule, while there is almost no support in our experiment for the constrained equal awards rule or other fairness rules suggested in the normative literature.
| Original language | English |
|---|---|
| Pages (from-to) | 2832-2841 |
| Number of pages | 10 |
| Journal | Management Science |
| Volume | 65 |
| Issue number | 6 |
| Early online date | 2018 |
| DOIs | |
| Publication status | Published - 1 Jun 2019 |
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Keywords
- Bankruptcy
- Lab experiment
- The claims problem
Cite this
}
Fairness in bankruptcies : An experimental study. / Cappelen, Alexander W.; Luttens, Roland Iwan; Sørensen, Erik; Tungodden, Bertil.
In: Management Science, Vol. 65, No. 6, 01.06.2019, p. 2832-2841.Research output: Contribution to Journal › Article › Academic › peer-review
TY - JOUR
T1 - Fairness in bankruptcies
T2 - An experimental study
AU - Cappelen, Alexander W.
AU - Luttens, Roland Iwan
AU - Sørensen, Erik
AU - Tungodden, Bertil
PY - 2019/6/1
Y1 - 2019/6/1
N2 - The pari passu principle of awarding claimants proportionally to their pre-insolvency claims is the most prominent principle in the law of insolvency. We report from a lab experiment designed to study whether people find this principle a fair solution to the bankruptcy problem. The experimental design generates situations where participants work and accumulate claims in firms, some of which subsequently go bankrupt. Third-party arbitrators are randomly assigned to determine how the liquidation value of the bankrupt firms should be distributed between claimants. Our main finding is that there is a striking support for the pari passu principle. We estimate a random utility model that allows for the arbitrators to differ in what they consider a fair solution to the bankruptcy problem and find that about 85% of the participants endorse the proportional rule. We also find that a nonnegligible fraction of the arbitrators follow the constrained equal losses rule, while there is almost no support in our experiment for the constrained equal awards rule or other fairness rules suggested in the normative literature.
AB - The pari passu principle of awarding claimants proportionally to their pre-insolvency claims is the most prominent principle in the law of insolvency. We report from a lab experiment designed to study whether people find this principle a fair solution to the bankruptcy problem. The experimental design generates situations where participants work and accumulate claims in firms, some of which subsequently go bankrupt. Third-party arbitrators are randomly assigned to determine how the liquidation value of the bankrupt firms should be distributed between claimants. Our main finding is that there is a striking support for the pari passu principle. We estimate a random utility model that allows for the arbitrators to differ in what they consider a fair solution to the bankruptcy problem and find that about 85% of the participants endorse the proportional rule. We also find that a nonnegligible fraction of the arbitrators follow the constrained equal losses rule, while there is almost no support in our experiment for the constrained equal awards rule or other fairness rules suggested in the normative literature.
KW - Bankruptcy
KW - Lab experiment
KW - The claims problem
UR - http://www.scopus.com/inward/record.url?scp=85066940537&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85066940537&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2018.3029
DO - 10.1287/mnsc.2018.3029
M3 - Article
VL - 65
SP - 2832
EP - 2841
JO - Management Science
JF - Management Science
SN - 0025-1909
IS - 6
ER -