Two axiomatizations of the pairwise netting proportional rule in financial networks

We consider financial networks where agents are linked to each other via mutual liabilities. In case of bankruptcy, one needs to distribute the assets of bankrupt agents over the other agents. One common approach is to first apply pairwise netting of mutual liabilities and next use the proportional rule to determine the payments based on the net liabilities. We refer to this as the pairwise netting proportional rule. The pairwise netting proportional rule satisfies the basic requirements of claims boundedness, limited liability, priority of creditors, and continuity. It also satisfies the desirable properties of net impartiality, an agent that has two creditors with the same net claim pays the same amount to both creditors on top of pairwise netting, and invariance to mitosis, an agent that splits into a number of identical agents is not affecting the payments of the other agents. We first demonstrate that if net impartiality and invariance to mitosis, together with the basic requirements, are regarded as imperative properties, then payments should be determined by the pairwise netting proportional rule. We also obtain a second axiomatization by dropping the continuity requirement and replacing invariance to mitosis by the axiom of invariance to proportional splitting, a proportional assignment of the assets and liabilities of an agent to a newly created agent, should not affect the payments of the other agents.

Authors

Publication Details

Journal
European Journal of Operational Research
Published
2025-04-16
DOI
https://doi.org/10.1016/j.ejor.2025.04.008
Citations
2
Primary Topic
Game Theory and Voting Systems
Type
article
Field-Weighted Citation Impact
6.26

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article

Two axiomatizations of the pairwise netting proportional rule in financial networks

Péter Csóka, P. Jean‐Jacques Herings
2 citations
European Journal of Operational Research
Game Theory and Voting Systems
6.26
article

Two axiomatizations of the pairwise netting proportional rule in financial networks

Péter Csóka, P. Jean‐Jacques Herings
article en
2 citations

Abstract

We consider financial networks where agents are linked to each other via mutual liabilities. In case of bankruptcy, one needs to distribute the assets of bankrupt agents over the other agents. One common approach is to first apply pairwise netting of mutual liabilities and next use the proportional rule to determine the payments based on the net liabilities. We refer to this as the pairwise netting proportional rule. The pairwise netting proportional rule satisfies the basic requirements of claims boundedness, limited liability, priority of creditors, and continuity. It also satisfies the desirable properties of net impartiality, an agent that has two creditors with the same net claim pays the same amount to both creditors on top of pairwise netting, and invariance to mitosis, an agent that splits into a number of identical agents is not affecting the payments of the other agents. We first demonstrate that if net impartiality and invariance to mitosis, together with the basic requirements, are regarded as imperative properties, then payments should be determined by the pairwise netting proportional rule. We also obtain a second axiomatization by dropping the continuity requirement and replacing invariance to mitosis by the axiom of invariance to proportional splitting, a proportional assignment of the assets and liabilities of an agent to a newly created agent, should not affect the payments of the other agents.

European Journal of Operational ResearchVol. 325(3)
Nemzeti Kutatási Fejlesztési és Innovációs Hivatal, Innovációs és Technológiai Minisztérium, Nemzeti Kutatási, Fejlesztési és Innovaciós Alap, National Research, Development and Innovation Office
Openalex Percentile: Top 5%
Game Theory and Voting Systems
6.26
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