Divide and choose: An informationally robust strategic approach to bankruptcy problems

Jiawen Li and Yuan Ju

Journal of Mathematical Economics, 2023, vol. 107, issue C

Abstract: This paper proposes a simple and general strategic approach for analyzing bankruptcy problems. We construct three strategic bargaining games and show that they yield unique subgame perfect equilibrium (SPE) outcomes that coincide with the allocations given by the three prominent solution concepts, the constrained equal awards rule, the constrained equal losses rule and the Talmud rule, respectively. We also discuss the robustness of the result in the presence of certain incomplete information. The approach can be readily extended to study alternative solutions for bankruptcy problems or other settings such as surplus sharing problems, and is further enriched by considering a voting stage. Central to all these bargaining protocols is an extended and context-fitting “divide-and-choose” mechanism.

Keywords: Bankruptcy problem; Talmud rule; Strategic bargaining; Subgame perfect equilibrium; Divide-and-choose (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:107:y:2023:i:c:s0304406823000551

DOI: 10.1016/j.jmateco.2023.102862

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