Determining Values Using Options Contracts

Abstract This paper presents a simple mechanism for allocating a single good in partnership dissolution. Since in the areas of probate, family, partnership and bankruptcy law the establishment of the value of assets is essential this mechanism can be useful. We illustrate its application for the case of determining the value of a house in a divorce proceeding. We show that when transactions costs are permitted, our mechanism shows a wider range of equilibrium outcomes than existing mechanisms such as Texas shootouts, implying it offers more equal and fair divisions. In addition, if private valuations of an asset are allowed, the proposed mechanism has an advantage based on the efficiency criterion compared to Texas shootouts.