Efficiency and Distributional Fairness in a Bankruptcy Procedure: A Laboratory Experiment

Acha Rajesh Kumar (), Sarkar Sumit () and Guha Apratim ()
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Acha Rajesh Kumar: 28696 XLRI Xavier School of Management , Jamshedpur, India
Sarkar Sumit: 28696 XLRI Xavier School of Management , Jamshedpur, India
Guha Apratim: 28696 XLRI Xavier School of Management , Jamshedpur, India

Review of Law & Economics, 2025, vol. 21, issue 2, 323-355

Abstract: We undertake a laboratory experiment to evaluate whether the corporate bankruptcy procedure employed under the current Indian law simultaneously achieves the dual objectives of efficiency and fairness. As the baseline scenario, we deploy the procedure used under the current Indian bankruptcy law. The law adopts a unique mandatory auction mechanism, which combines the claim distribution mechanism with the asset deployment process of the bankrupt firm. Results reveal that, under the existing mechanism, there exists a fairness-efficiency trade-off. If the outcome is efficient, i.e. if the value of the firm is maximized, then it is often distributionally unfair, i.e. the operational creditors do not get their fair share of claim recovery. In contrast, if the outcome is distributionally fair, then it may be inefficient. We introduced a mechanism that separates the deployment and distribution processes. Efficiency and fairness simultaneously improve under the modified mechanism.

Keywords: bankruptcy; distributional fairness; efficiency; mandatory auction; experiment (search for similar items in EconPapers)
JEL-codes: C90 C92 D63 K22 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/rle-2024-0023

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