The value of a fallback option

Original Paper

Abstract

Fallback options are relatively common in the business context. If for example a firm fails to acquire a certain target firm—a first-best solution—it may decide to attempt the acquisition of another takeover target—a second best solution. When a decision maker tries to obtain the first-best solution, she may frequently choose different levels of effort to invest into its pursuit. This level of effort is generally influenced by the availability of a fallback option in case she fails to succeed in obtaining her first-best solution. Using a second price auction mechanism, we experimentally test whether subjects react to the existence and attractiveness of this fallback option by changing their bidding behavior. Our results show that subjects only partially adjust to the existence of the fallback option according to the theoretical prediction.

Keywords

Fallback option Second price auction Bidding behavior 

Mathematics Subject Classification

D44 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  • Sascha Füllbrunn
    • 1
  • Stefan Kreiner
    • 2
  • Stefan Palan
    • 2
    • 3
  1. 1.Institute for Management ResearchRadboud UniversityNijmegenThe Netherlands
  2. 2.Institute of Banking and FinanceUniversity of GrazGrazAustria
  3. 3.Department of Banking and FinanceUniversity of InnsbruckInnsbruckAustria

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