Fairness in bankruptcy situations

The working paper "Fairness in bankruptcy situations: an experimental study" by researchers at NHH and The Choice Lab, has just been released.

25.08.2015 - Ed.

The project is based on a lab experiment that studies whether people find the pari passu principle a fair solution to the bankruptcy problem. The paper is written by The Choice Lab researchers Alexander W. Cappelen, Erik Ø. Sørensen and Bertil Tungodden together with Roland I. Luttens (Amsterdam University College & VU University Amsterdam).

The project is supported by The Research Council of Norway and Center for the Study of Mind in Nature (University of Oslo) and administrated by The Choice Lab at NHH.


"The pari passu principle 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 of awarding claimants proportionally to their pre-insolvency claims. 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 percent of the participants endorse the proportional rule. We also find that a non-negligible 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. Finally, we show that the estimated random utility model nicely captures the observed arbitrator behavior, in terms of both the overall distribution of awards and the relationship between awards and claims."

Go to The Choice Lab blog to download the working paper

Alexander W. Cappelen, Roland I. Luttons, Erik Ø. Sørensen and Bertil Tungodden.

Kontakt: paraplyen@nhh.no
Redaktør: Astri Kamsvåg
Ansvarleg redaktør: Kristin Risvand Mo

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