The Texas Shootout under Uncertainty

TL;DR

This paper analyzes how Knightian Uncertainty affects the Texas Shoot-Out mechanism for co-owned company allocation, showing that uncertainty can deter premature dissolutions and influence strategic behavior.

Contribution

It models ambiguity aversion in the mechanism, deriving optimal pricing strategies under uncertainty and analyzing their impact on efficiency and strategic choices.

Findings

Uncertainty deters premature dissolutions.

Optimal price announcement hedges against valuation uncertainty.

Mechanism remains efficient near the median valuation under uncertainty.

Abstract

We investigate the allocation of a co-owned company to a single owner using the Texas Shoot-Out mechanism with private valuations. We identify Knightian Uncertainty about the peer's distribution as a reason for its deterrent effect of a premature dissolving. Modeling uncertainty by a distribution band around a reference distribution $F$, 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. If valuations are believed to be close, less uncertainty is required for the mechanism to always be efficient and reduce premature dissolvements.