Fairness in Bankruptcy Situations: An Experimental Study, 2015

The pari passu principle is the most prominent principle in the law of insolvency. This study is based on a lab experiment designed to study whether people find this principle a fair solution to the bankruptcy problem. The experimental design generates situations where participants work and accumulate claims in firms, some of which subsequently go bankrupt. Third-party arbitrators were randomly assigned to determine how the liquidation value of the bankrupt firms should be distributed between claimants. The main finding was that there is a striking support for the pari passu principle of awarding claimants proportionally to their pre-insolvency claims. A random utility model that allows for the arbitrators to differ in what they consider a fair solution to the bankruptcy problem was estimates, and found that about 85 percent of the participants endorsed the proportional rule. Also a non-negligible fraction of the arbitrators followed the constrained equal losses rule, while there was almost no support in the experiment for the constrained equal awards rule or other fairness rules suggested in the normative literature. Finally, the estimated random utility model nicely captures the observed arbitrator behavior, in terms of both the overall distribution of awards and the relationship between awards and claims.

The data includes three datasets with information about: 1) decision-makers 2) production decision and outcomes 3) third-party distributions under bankruptcy.