Template-type: ReDif-Paper 1.0
Author-Name: Karagözoğlu Emin 
Author-workplace-name: METEOR
Title: A Noncooperative Approach to Bankruptcy Problems with an Endogenous Estate
Abstract: We introduce a new class of bankruptcy problems in which the value of the estate is endogenous and depends on agents'' investment decisions. There are two investment alternatives: investing in a company and becoming a shareholder (risky asset) and depositing money into a savings account (risk-free asset). Bankruptcy is a possible event only for the risky asset. We define a game between agents each of which aims to maximize his expected payoff by choosing an investment alternative and a company management which aims to maximize profits by choosing a bankruptcy rule. There are two types of agents in our basic model, who are differentiated by their incomes. We, first, consider three well-known bankruptcy rules: the proportional rule, the constrained equal awards rule and the constrained equal losses rule. We show that there always exists a pure strategy subgame perfect Nash equilibrium, which involves the proportional rule. This result is independent of the income distribution in the economy and holds even under one-sided uncertainty on the income distribution. Moreover, if the company optimally chooses the return rate to be paid to investors, the unique subgame perfect Nash equilibrium involves the proportional rule. We also extend our model in two dimensions: (i) to a larger set of rules containing the Talmud rule and (ii) to two companies competing over potential investors.
Keywords: Economics (Jel: A)
Series: Research Memoranda
Creation-Date: 2010
Number: 027
File-URL: http://digitalarchive.maastrichtuniversity.nl/fedora/objects/guid:553698da-dd2c-455c-b84d-49ccfdf04405/datastreams/ASSET1/content
File-Format: application/pdf
File-Size: 649480
Handle: RePEc:unm:umamet:2010027