The Texas Shoot-Out under Knightian uncertainty

Abstract

We investigate a widely used mechanism to resolve disputes among business partners, known as Texas Shoot-Out, under Knightian uncertainty. For a non-degenerate range of intermediate valuations, an ambiguity-averse divider truthfully reveals their valuation in equilibrium. As a consequence, the resulting outcome is efficient, in contrast to the Bayesian case. With equal shares, both agents prefer ex-ante to be the chooser and would like to avoid triggering the mechanism in the first place.