# ? E XERCISE 280.4 (Adverse selection) Firm A (the “acquirer”) is considering taking over firm T…

?   EXERCISE 280.4 (Adverse selection)  Firm A (the “acquirer”) is considering taking

over firm T (the “target”). It does not know firm T’s value; it believes that this value, when firm T is controlled by its own management, is at least \$0 and at most

### Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now

3   \$100, and assigns equal probability to each of the 101 dollar values in this range. Firm T will be worth 50% more under firm A’s management than it is under its own management. Suppose that firm A bids 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

2 x − y and T’s payoff is y; if T rejects    A’s offer,  A’s payoff is 0 and T’s payoff is

x.     Model this situation as a Bayesian game in which firm A chooses how much  to offer and firm T decides the lowest offer to accept. Find the Nash equilibrium (equilibria?) of this game. Explain why the logic behind the equilibrium is called adverse selection.