Decentralization and Mutual Liability Rules

CentER Discussion Paper No. 2019-035

26 Pages Posted: 3 Jan 2020

See all articles by M.W. Ketelaars

M.W. Ketelaars

Tilburg University - Tilburg University School of Economics and Management

Peter Borm

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Econometrics & Operations Research

Marieke Quant

Tilburg University - Department of Econometrics & Operations Research

Date Written: December 11, 2019

Abstract

This paper builds on the recent work of Groote Schaarsberg, Reijnierse and Borm (2018) on mutual liability problems. In essence, a mutual liability problem comprises a financial network in which agents may have both monetary individual assets and mutual liabilities. Here mutual liabilities reflect rightful monetary obligations from past bilateral transactions. To settle these liabilities by reallocating the individual assets, mutual liability rules are analyzed that are based on centralized bilateral transfer schemes which use a certain bankruptcy rule as its leading allocation mechanism. In this paper we derive a new characterization of mutual liability rules by taking a decentralized approach instead, which is based on a recursive individual settlement procedure. We show that for bankruptcy rules that satisfy composition, this decentralized procedure always leads to the same allocation as the one prescribed by the corresponding mutual liability rule based on centralized bilateral transfer schemes.

Keywords: Mutual Liability Rules, Individual Settlement Allocation Procedure, Decentralization, Composition Property

JEL Classification: C71, G33

Suggested Citation

Ketelaars, Martijn and Borm, Peter E. M. and Quant, Marieke, Decentralization and Mutual Liability Rules (December 11, 2019). CentER Discussion Paper No. 2019-035, Available at SSRN: https://ssrn.com/abstract=3502197 or http://dx.doi.org/10.2139/ssrn.3502197

Martijn Ketelaars (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Peter E. M. Borm

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Econometrics & Operations Research

Tilburg, 5000 LE
Netherlands

Marieke Quant

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

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