Firm A is considering taking over firm T. Firm A does not know firm T’s value,...

Firm A is considering taking over firm T. Firm A does not know firm T’s value, and believes that firm T’s value x is uniformly distributed on [0, 100]. Firm T will be worth 50% more under firm A’s management than it is under its own management. Suppose firm A offers y to take over firm T, and firm T is worth x under its own management. Then if T accepts A’s offer, A’s payoff is 3/2?−? and T’s payoff is y; if T rejects A’s offer, A’s payoff is 0 and T’s payoff is x.

(a) Find the Nash equilibrium of the game where A chooses how much to offer and T decides the lowest offer to accept.

(b) Explain the logic of adverse selection behind the equilibrium.

Expert Solution

Rahul Sunny answered 2 years ago

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