Dissolving a partnership dynamically

In financial disputes arising from divorce, inheritance, or the dissolution of a partnership, frequently the need arises to assign ownership of an indivisible item to one member of a group. This paper introduces and analyzes a dynamic auction for simply and efficiently allocating an item when participants are privately informed of their values. In the auction, the price rises continuously. A bidder who drops out of the auction, in return for surrendering his claim to the item, obtains compensation equal to the difference between the price at which he drops and the preceding drop price. When only one bidder remains, that bidder wins the item and pays the compensations of his rivals. We characterize the unique equilibrium with risk-neutral and CARA risk averse bidders. We show that dropout prices are decreasing as bidders become more risk averse. Each bidder's equilibrium payoff is at least 1/N-th of his value for the item.