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The value of a fallback option

Listed author(s):
  • Sascha Füllbrunn

    ()

  • Stefan Kreiner

    ()

  • Stefan Palan

    ()

Fallback options are relatively common in the business context. If for example a firm fails to acquire a certain target firm—a first-best solution—it may decide to attempt the acquisition of another takeover target—a second best solution. When a decision maker tries to obtain the first-best solution, she may frequently choose different levels of effort to invest into its pursuit. This level of effort is generally influenced by the availability of a fallback option in case she fails to succeed in obtaining her first-best solution. Using a second price auction mechanism, we experimentally test whether subjects react to the existence and attractiveness of this fallback option by changing their bidding behavior. Our results show that subjects only partially adjust to the existence of the fallback option according to the theoretical prediction. Copyright Springer-Verlag Berlin Heidelberg 2015

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File URL: http://hdl.handle.net/10.1007/s10100-015-0389-4
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Article provided by Springer & Slovak Society for Operations Research & Hungarian Operational Research Society & Czech Society for Operations Research & Österr. Gesellschaft für Operations Research (ÖGOR) & Slovenian Society Informatika - Section for Operational Research & Croatian Operational Research Society in its journal Central European Journal of Operations Research.

Volume (Year): 23 (2015)
Issue (Month): 2 (June)
Pages: 375-388

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Handle: RePEc:spr:cejnor:v:23:y:2015:i:2:p:375-388
DOI: 10.1007/s10100-015-0389-4
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  1. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Varying the number of bidders in the first-price sealed-bid auction: experimental evidence for the one-shot game," Theory and Decision, Springer, vol. 75(3), pages 421-447, September.
  2. Kunreuther, Howard & Kleindorfer, Paul R, 1986. "A Sealed-Bid Auction Mechanism for Siting Noxious Facilities," American Economic Review, American Economic Association, vol. 76(2), pages 295-299, May.
  3. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
  4. Rodney Garratt & Mark Walker & John Wooders, 2012. "Behavior in second-price auctions by highly experienced eBay buyers and sellers," Experimental Economics, Springer;Economic Science Association, vol. 15(1), pages 44-57, March.
  5. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  6. Todd Cherry & Peter Frykblom & Jason Shogren & John List & Melonie Sullivan, 2004. "Laboratory Testbeds and Non-Market Valuation: The Case of Bidding Behavior in a Second-Price Auction with an Outside Option," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 29(3), pages 285-294, November.
  7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  8. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
  9. Kirchkamp, Oliver & Poen, Eva & Rei, J. Philipp, 2009. "Outside options: Another reason to choose the first-price auction," European Economic Review, Elsevier, vol. 53(2), pages 153-169, February.
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