Trigger Happy or Gun Shy? Dissolving Common-Value Partnerships with Texas Shootouts

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractMany partnership contracts (and other joint-venture agreements) include so-called "Texas Shootout Clauses" to govern future breakups. In a Texas Shootout, one partner names a single buy-sell price and the other partner has the option to buy or sell at that price. While the prior literature has considered the allocative efficiency of the Texas Shootout, this paper focuses on the incentives of private parties to make these offers to begin with. We consider a model where sole ownership is more efficient than joint ownership. Although both partners are equally capable, one has private information about the common value of the asset. When given the choice, they avoid making buy-sell offers because these offers give away bargaining surplus (the partners are "gun shy"). Instead, they often (but not always) prefer to make simple offers to buy or simple offers to sell and bargaining failures arise. Texas Shootout contracts that assign trigger rights -where one party can force the other to name a price -increase efficiency and are jointly desirable.2

Shotgun Mechanisms for Common-Value Partnerships: The Unassigned-Offeror Problem

“…† Harvard Law School and NBER. 1 These results follow from Propositions 1 and 2 presented in our previous work (Brooks et al, 2010). The derivative of this expression with respect to y equals 1 2 − F (y).…”

“…To understand this outcome, it is useful to restate our previous findings regarding the equilibria with assigned offerors (Brooks et al, 2010). 6 Proposition 1 first characterizes the unique fully-separating equilibrium of the shotgun mechanism when the informed party, Owner 1, makes the buy-sell offer.…”

“…6 See our previous work (Brooks et al, 2010) for formal discussion and proofs. 7 There also exists a pooling equilibrium where Owner 1 offers p(x) = x+a 2 and Owner 2 mixes equilibrium of the shotgun mechanism when the uninformed party, Owner 2, makes the buy-sell offer.…”

Minimizing Regret When Dissolving a Partnership

“…Again, there is no dominance relation. 3 Finally, it is not difficult to show that the mechanism λ = 1/2 minimizes the worst-case regret ex-ante. This is because…”

Partnership dissolution, complementarity, and investment incentives

“…That rule is widely used in practice and recommended by legal advisors (see for example Mancuso and Laurence (2003)). Indeed, as Brooks and Spier (2004) …”