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Efficiency and Distributional Fairness in a Bankruptcy Procedure: A Laboratory Experiment

  • Rajesh Kumar Acha ORCID logo EMAIL logo , Sumit Sarkar ORCID logo and Apratim Guha
Published/Copyright: April 14, 2025
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Review of Law & Economics
From the journal Review of Law & Economics Volume 21 Issue 2

Abstract

We undertake a laboratory experiment to evaluate whether the corporate bankruptcy procedure employed under the current Indian law simultaneously achieves the dual objectives of efficiency and fairness. As the baseline scenario, we deploy the procedure used under the current Indian bankruptcy law. The law adopts a unique mandatory auction mechanism, which combines the claim distribution mechanism with the asset deployment process of the bankrupt firm. Results reveal that, under the existing mechanism, there exists a fairness-efficiency trade-off. If the outcome is efficient, i.e. if the value of the firm is maximized, then it is often distributionally unfair, i.e. the operational creditors do not get their fair share of claim recovery. In contrast, if the outcome is distributionally fair, then it may be inefficient. We introduced a mechanism that separates the deployment and distribution processes. Efficiency and fairness simultaneously improve under the modified mechanism.

Keywords: bankruptcy; distributional fairness; efficiency; mandatory auction; experiment
JEL Classification: K22; C90; C92; D63
Corresponding author: Rajesh Kumar Acha, XLRI Xavier School of Management, Jamshedpur, India, E-mail:

Funding source: XLRI Xavier School of Management

Award Identifier / Grant number: XLRG2305

Award Identifier / Grant number: XLRG2306

Acknowledgment

The authors thank the participants of the Wharton-Harvard Insolvency and Restructuring Conference, held at The Wharton School, University of Pennsylvania, Philadelphia in September 2023, for their feedback that helped immensely in improving the quality of the paper.

  1. Research ethics: The study received ethics approval from the Institutional Review Board (IRB) of XLRI, Jamshedpur, India. Application number: XLRIJ-2023-05-02.

  2. Conflict of interest: None.

  3. Research funding: Sumit Sarkar and Apratim Guha gratefully acknowledge research grants (grant IDs XLRG2305 and XLRG2306) from XLRI Xavier School of Management, Jamshedpur, India.

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/rle-2024-0023).

Received: 2024-02-07
Accepted: 2025-01-28
Published Online: 2025-04-14

© 2025 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

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  4. Legal Compliance and Detection Avoidance: Results on the Impact of Different Law-Enforcement Designs
  5. Women in Piracy. Experimental Perspectives on Copyright Infringement
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https://doi.org/10.1515/rle-2024-0023
Keywords for this article
bankruptcy; distributional fairness; efficiency; mandatory auction; experiment

Articles in the same Issue

  1. Frontmatter
  2. Articles
  3. The Impact of Online Dispute Resolution on the Judicial Outcomes in India
  4. Legal Compliance and Detection Avoidance: Results on the Impact of Different Law-Enforcement Designs
  5. Women in Piracy. Experimental Perspectives on Copyright Infringement
  6. Is Investment in Prevention Correlated with Insurance Fraud? Theory and Experiment
  7. Bias, Trust, and Trustworthiness: An Experimental Study of Post Justice System Outcomes
  8. Do Sanctions or Moral Costs Prevent the Formation of Cartel Agreements?
  9. Efficiency and Distributional Fairness in a Bankruptcy Procedure: A Laboratory Experiment
  10. Soft Regulation for Financial Advisors
  11. Conciliation, Social Preferences, and Pre-Trial Settlement: A Laboratory Experiment
  12. The Impact of Tax Culture on Tax Rate Structure Preferences: Results from a Vignette Study with Migrants and Non-Migrants in Germany
  13. Perceptions of Justice: Assessing the Perceived Effectiveness of Punishments by Artificial Intelligence versus Human Judges
  14. Judged by Robots: Preferences and Perceived Fairness of Algorithmic versus Human Punishments
  15. The Hidden Costs of Whistleblower Protection
  16. The Missing Window of Opportunity and Quasi-Experimental Effects of Institutional Integration: Evidence from Ukraine
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