A Talmudic Bankruptcy Solution: The CCC Principle

Following a bankruptcy, how should we distribute the available assets among the eligible creditors? Most people would accept a proportional distribution — for each claimant, calculate her percentage of the sum of all claims and assign her that same percentage of total assets. However, this is not the only reasonable approach. For example, if every claim is at least as large as total assets, assigning an equal share to every creditor is a sensible solution. Three numerical bankruptcy examples for three claimants, discussed 2,000 years ago in the Talmud, coincide with the above two approaches, but the third case remained a puzzle until recently when modern game theory (Aumann and Maschler, 1985) was enlisted to demystify all cases. This paper explains the unifying principle, the Contested-Claim Consistency principle (CCC, or CG-Consistent principle), behind the Talmudic examples. Importantly, it uses different means to better understand the logic behind the CCC bankruptcy allocations and points out the subtle yet important properties behind them. This study aims to clarify the meaning of fairness underlying the CCC allocation, and proposes that CCC may better convey the meaning of the pari passu provision that appears in many International Sovereign Debt Instruments.