What is it about?
How should financial losses be shared among the members of a country or some smaller community? In situations of bankruptcy or bequest it was found that often the proportionality principle was chosen, meaning that individuals received an indemnification proportional to their original claims. We wanted to find out whether this principle would also find support in other situations involving losses so that we designed an experiment in which four agents start out with a differing amount of money and are then informed that a loss which occurred has to be shared by the group. Our main result is that proportionality is rarely proposed and even less frequently accepted as a solution agreed to unanimously by all group members.
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Why is it important?
Bargaining over losses has been investigated much less frequently than bargaining over gains. But losses can occur on a large scale. Examples from the recent past are the collapse of Lehman Brothers in the US in 2008 which generated a severe financial crisis in many Western countries with severe losses for many individuals and governments. Another more recent example is the Brexit decision of the UK government which led to shortages in food supply and a decline in economic growth. A third example is the ongoing migration of refugees from Africa and Asia to central Europe which creates enormous costs for many governments. How should these losses be borne, how should they be divided up among the population? These are questions of far-reaching importance for society.
Perspectives
Our publication is an addition to the relatively small number of articles that consider the division of losses. Our paper showed that there are other rules than the proportionality principle that people follow when the issue is burden sharing. One example is the constrained equal awards rule, another example is proposed in the paper. It focusses on two aspects, namely the equal division of a loss and a weighted difference between what the individual agent possesses and what the average endowment of the community is like. It was a pleasure to write this article together with my co-authors with whom I have been having long standing collaborations.
Professor Wulf Gaertner
University of Osnabrueck
Read the Original
This page is a summary of: Against the proportionality principle: Experimental findings on bargaining over losses, PLoS ONE, July 2019, PLOS,
DOI: 10.1371/journal.pone.0218805.
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