Parametric Rules for State Contingent Claims

37 Pages Posted: 1 Feb 2021 Last revised: 10 Mar 2021

See all articles by Siddhartha Chatterjee

Siddhartha Chatterjee

affiliation not provided to SSRN

Sinan Ertemel

affiliation not provided to SSRN

Rajnish Kumar

Queen's University Management School

Date Written: February 1, 2021

Abstract

We study bankruptcy rules in a setting where individuals have state contingent claims. A rule must distribute shares before uncertainty resolves. Within a wide class of parametric rules, we first characterize rules of ex-ante form in terms of the way that the rule processes inherent uncertainty in the individual claims. The key property is: No Penalty for Risk. It says that the rule does not penalize an individual in a situation that differs from another only in terms of the this individual's claim in that the former situation has a risky version of the riskless claim in the latter situation. With regard to the ex-post characterization, our key property is: Indifference to Independent Combinations. It says that if an individual is risk neutral with expected utility preferences then any rule that makes her indifferent between any bankruptcy problem and a corresponding independent combination of gamble between a degenerate gamble and a zero game (any bankruptcy game with zero endowment) forces the rule to be in the ex-post form. Finally, a partial comparative static result is provided which formalizes the claim that individuals generally and ex-ante rules more appealing when the level of the resource is suffciently low.

Keywords: C71, D63, D81

JEL Classification: Rationing, Parametric rules, State contingent claims, Axiomatic characterization

Suggested Citation

Chatterjee, Siddhartha and Ertemel, Sinan and Kumar, Rajnish, Parametric Rules for State Contingent Claims (February 1, 2021). QMS Research Paper 2021/03, Available at SSRN: https://ssrn.com/abstract=3777083 or http://dx.doi.org/10.2139/ssrn.3777083

Siddhartha Chatterjee

affiliation not provided to SSRN

Sinan Ertemel

affiliation not provided to SSRN

Rajnish Kumar (Contact Author)

Queen's University Management School ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
8
Abstract Views
111
PlumX Metrics