I have just been reading a marvelous article by my colleague Lee Fennell entitled “Revealing Options.” The article will appear in the March, 2005, Harvard Law Review. It is about the legal use of mechanisms of self-valuation to deal with some vexing matters regarding the protection of subjective value.
Here is a marvelous example of the use of options to deal with a legal issue. It deals with a particular method, called the “Texas Shootout,” for dissolving partnerships:
The Texas Shootout leverages uncertainty about whether one will emerge as a buyer or seller of partnership shares into a truthful valuation statement. In a simple two-partner setting, the device would work as follows: One partner (P1) must name a price for her share of the partnership venture. The other partner (P2) can then choose to pay P1 that price to acquire P1’s share of the venture or can instead require P1 to buy out his share (that is, P2’s share) at that same price. When P1 sets a price, she is effectively making two representations. First, she is representing that she is indifferent between keeping her own half of the venture and receiving the stated amount of money. Second, she is representing that she is indifferent between obtaining the other half of the venture at the stated price and keeping the stated amount of money. Because the two halves of the enterprise are by definition equivalent and fungible, these two representations are made simultaneously when P1 provides a valuation for her half of the venture.
That’s a neat example of the use of self-valuation techniques and the insights of game theory to discuss a real legal issue.
TSU
