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Irreconcilable Differences: Judicial Resolution of Business Deadlock

Author

Listed:
  • Landeo, Claudia

    () (University of Alberta, Department of Economics)

  • Spier, Kathryn

    () (Harvard Law School)

Abstract

This article studies the judicial resolution of business deadlock. Asset valuation, a necessary component of business divorce procedures, can pose serious problems in case of closely-held businesses such as general partnerships and limited liability companies (LLCs). Courts face the challenge of designing valuation mechanisms that will trigger the owners to truthfully reveal their private information. We theoretically and experimentally assess the ex post judicial design and properties of judicially-mandated Shotgun and Private Auction mechanisms. In the former mechanism, the court would require one owner to name a buy-sell price, and the other owner would be required to either buy or sell his or her shares at the named price. In the latter mechanism, the court would mandate both owners to simultaneously submit a price to buy the other owner's assets. Our experimental findings support our theory: The Shotgun mechanism with an informed offeror is superior to the Private Auction in terms of an equity criterion. In the Shotgun mechanism, the informed offeror has an incentive to truthfully reveal his private information and, as a result, an equitable outcome is more likely to be achieved. The analysis presented in this article provides an equity rationale for the judicial implementation of the Shotgun mechanism in business divorce cases, and demonstrates the empirical feasibility of our proposal.

Suggested Citation

  • Landeo, Claudia & Spier, Kathryn, 2013. "Irreconcilable Differences: Judicial Resolution of Business Deadlock," Working Papers 2013-9, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2013_009
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    File URL: https://sites.ualberta.ca/~econwps/2013/wp2013-09.pdf
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    Cited by:

    1. Landeo, Claudia M. & Spier, Kathryn E., 2013. "Shotgun mechanisms for common-value partnerships: The unassigned-offeror problem," Economics Letters, Elsevier, vol. 121(3), pages 390-394.
    2. repec:elg:eechap:14176_9 is not listed on IDEAS
    3. Claudia M. Landeo, 2018. "Law and economics and tort litigation institutions: theory and experiments," Chapters,in: Research Handbook on Behavioral Law and Economics, chapter 9, pages 247-268 Edward Elgar Publishing.

    More about this item

    Keywords

    judicial resolution of business deadlocks; general partnerships; limited liability companies; closely-held business entities; shotgun provisions; buy-sell clauses; cake-cutting mechanisms; auctions; bargaining with common values; asymmetric information; experiments;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • Z18 - Other Special Topics - - Cultural Economics - - - Public Policy

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