Dissolving a partnership dynamically

In financial disputes arising from divorce, inheritance, or the dissolution of a partnership, frequently the need arises to assign ownership of an indivisible item to one member of a group. This paper introduces and analyzes a dynamic auction for simply and e¢ciently allocating an item when participants are privately informed of their values. In the auction, the price rises continuously. A bidder who drops out of the auction, in return for surrendering his claim to the item, obtains compensation equal to the di§erence between the price at which he drops and the preceding drop price. When only one bidder remains, that bidder wins the item and pays the compensations of his rivals. We characterize the unique equilibrium with risk-neutral and CARA risk averse bidders. We show that dropout prices are decreasing as bidders become more risk averse. Each bidder’s equilibrium payo§ is at least 1/N -th of his value for the item. ∗We are grateful for comments from an anonymous referee and seminar particpants at the Australian National University, National University of Singapore, NYU Abu Dhabi, University of Alabama, University of Melbourne, University of New South Wales, University of Texas Dallas, University of Washington, Vanderbilt University, and the 2015 meetings of the SAET. Wooders is grateful for financial support from the Australian Research Council’s Discovery Projects funding scheme (project number DP140103566). †Department of Economics, Finance, and Legal Studies, University of Alabama ([email protected]). ‡Department of Economics, University of Technology Sydney ([email protected]). 1