Relations among the central rules in bankruptcy problems: A strategic perspective

Abstract We consider the “bankruptcy problem”, in which the liquidation value of a bankrupt firm has to be allocated among its creditors. By applying the Nash program to justify a bilaterally consistent rule, bilateral negotiations are traditionally resolved by applying the rule ( Dagan et al., 1997 , Chang and Hu, 2008 ). We introduce games in which bilateral negotiations are resolved by non-cooperative bargaining procedures and show that these games strategically justify the constrained equal awards rule, the constrained equal losses rule, the proportional rule, and the Talmud rule. By focusing on the differences in the non-cooperative bargaining procedures that capture the spirit of the rules, our results unveil novel connections among them.

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