Bankruptcy Problems with Self-Serving Biased Reference Points

I study bankruptcy problems under the assumption that claimants display reference dependent preferences and set self-serving biased reference points. I consider two possible specifications for the self-serving bias, additive and multiplicative, and investigate how they impact on claimants’ perceived gains and losses, and thus ultimately on welfare. Focusing on the four most prominent allocation rules (Proportional, Constrained Equal Awards, Constrained Equal Losses, and Talmud), I show that all rules are welfare equivalent when the bias takes the additive form, whereas a clear ranking emerges, with the Constrained Equal Losses on top, when the bias is multiplicative.