An Ancient Bankruptcy Solution Makes Economic Sense

Abstract

While econometrics is a reasonable recent discipline, quantitative solutions to economic problem have been proposed since the ancient times. In particular, solutions have been proposed for the bankruptcy problem: how to divide the assets between the claimants? One of the challenges of analyzing ancient solutions to economics problems is that these solutions are often presented not as a general algorithm, but as a sequence of examples. When there are only a few such example, it is often difficult to convincingly extract a general algorithm from them. This was the case, for example, for the supposedly fairness-motivated Talmudic solution to the bankruptcy problem: only in the mid 1980s, the Nobelist Robert Aumann succeeded in coming up with a convincing general algorithm explaining the original examples. What remained not so clear in Aumann’s explanation is why namely this algorithm best reflects the corresponding idea of fairness. In this paper, we find a simple economic explanation for this algorithm.