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The Texas Shoot-Out under Knightian Uncertainty

Gerrit Bauch and Frank Riedel
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Gerrit Bauch: Center for Mathematical Economics, Bielefeld University
Frank Riedel: Center for Mathematical Economics, Bielefeld University

No 664, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: The allocation of a co-owned company to a single owner using the Texas Shoot-Out mechanism with private valuations is investigated. We identify Knightian Uncertainty about the peer’s distribution as the reason for its deterrent effect of an immature dissolving. Modeling uncertainty by a compact environment around a reference distribution *F* in the Prohorov metric, we derive the optimal price announcement for an ambiguity averse divider. The divider hedges against uncertainty for valuations close to the median of *F*, while extracting expected surplus for high and low valuations. The outcome of the mechanism is efficient for valuations around the median. A risk neutral co-owner prefers to be the chooser, even strictly so for any valuation under low levels of uncertainty and for extreme valuations under high levels of uncertainty.

Keywords: Knightian Uncertainty in Games; Texas Shout-Out; Partnership Dissolution (search for similar items in EconPapers)
Pages: 33
Date: 2022-04-14
New Economics Papers: this item is included in nep-mic
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https://pub.uni-bielefeld.de/download/2962409/2962412 First Version, 2022 (application/pdf)

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