Question

Abigail (Player 1) and Joseph (Player 2) have decided to dissolve a business partnership whose assets have been valued at $100,000. The partnership charter states that the senior partner, Abigail, make an asset division offer to the junior partner, Joseph. The junior partner can Accept, in which case the proposed division is implemented, or Reject, in which case the case goes to litigation. Litigating involves a cost of $20,000 in legal fees for each partner. If the case goes to litigation, the typical verdict almost always assigns 60% of the assets to the senior partner and 40% to the junior partner. For simplicity, assume that there is no uncertainty regarding the distribution of assets if they go to litigation. According to the partnership contract, there are only two possible offers that Abigail is allowed to make. She can offer either a 50-50 split or a 70-30 split (with the senior partner taking 70%).

A. Diagram the extensive form game of this situation including payoffs.

B. Present the strategic form for the game.

C. In Abigail’s position, what strategy would you adopt? Explain your answer.

Answer 1