Abstract
This paper builds on the recent work of Groote Schaarsberg et al. (Math Methods Oper Res 87(3):383–409, 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. Finally, we introduce a new reduction method for mutual liability problems and prove that any bankruptcy-rule-based mutual liability rule is invariant with respect to such a reduction.
Highlights
The Wall Street Crash of October 1929 sparked widespread despair among American consumers and firms about their investments
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
There is a particular property of a bankruptcy rule that bridges the gap between the allocation prescribed by a φ-based mutual liability rule and the outcome of the corresponding individual settlement allocation procedure
Summary
The Wall Street Crash of October 1929 sparked widespread despair among American consumers and firms about their investments. We would like to thank two anonymous referees for their helpful comments
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