An Axiomatization of the Proportional Rule in Financial Networks

40 Pages Posted: 23 Jan 2017

See all articles by Péter Csóka

Péter Csóka

Corvinus University of Budapest; Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS)

P. Jean-Jacques Herings

Maastricht University

Date Written: December 21, 2016

Abstract

The most important rule to determine payments in real-life bankruptcy problems is the proportional rule. Many bankruptcy problems are characterized by network aspects and default may occur as a result of contagion. Indeed, in financial networks with defaulting agents, the values of the agents' assets are endogenous as they depend on the extent to which claims on other agents can be collected. These network aspects make an axiomatic analysis challenging. This paper is the first to provide an axiomatization of the proportional rule in financial networks. Our two central axioms are impartiality and non-manipulability by identical agents. The other axioms are claims boundedness, limited liability, priority of creditors, and continuity.

Keywords: financial networks, systemic risk, bankruptcy rules, proportional rule

JEL Classification: C71, G10

Suggested Citation

Csóka, Péter and Herings, P. Jean-Jacques, An Axiomatization of the Proportional Rule in Financial Networks (December 21, 2016). Available at SSRN: https://ssrn.com/abstract=2902653 or http://dx.doi.org/10.2139/ssrn.2902653

Péter Csóka

Corvinus University of Budapest ( email )

Fővám tér 8.
Budapest, 1093
Hungary

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

Tóth Kálmán utca 4.
Budapest, 1097
Hungary

P. Jean-Jacques Herings (Contact Author)

Maastricht University ( email )

Department of Economics
P.O. Box 616
6200 MD Maastricht
Netherlands
+31 43 3883636 (Phone)
+31 43 3884878 (Fax)

HOME PAGE: http://www.personeel.unimaas.nl/p.herings/herings.htm

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