Aim of the experiment is to test the role of institutional design (i.e. optimal bankruptcy law) as a commitment device to implement both ex ante and ex post efficiency in firm – specific investment decisions when moral hazard is binding. Criticism has been arisen against the current especially U.S. bankruptcy code capability to ensure an efficient allocation of resources. The debate on which institutional design leads to a more efficient project selection is therefore very lively and still very open. We label an "optimal bankruptcy law " a framework for decision making by the firm both before and after it enters into situation of financial distress. It should in fact provide the firm’s decision maker with optimal ex ante incentives to invest in firm – specific human capital and by placing him in a superior bargaining position in the bankruptcy negotiations, enforcing therefore the overall bargaining structure ex post. We run a pilot session of a two stage computerised experiment aimed to test a bankruptcy framework very close to that proposed by Berkovitch, Israel and Zender (1997), involving a sample of 50 subjects, all undergraduate students of LUISS University in Rome. In the first place we checked with a "group of control" for the optimal human capital selection imposed by the model. In the second stage we employ a "restricted auction" mechanism to check if that market mechanism (in which the creditor is not allowed to bid for the firm) ensure that the assets of the firm are directed to their highest value use.

Keywords: experiments, moral hazard in investment decision making, bankruptcy law.

Co-authors Marco Spallone and Valentina Sabato