Legal Hold-up in Cotenancy

Abstract

Abstract Our analysis (Baucells and Lippman [2001]) of the problem of legal hold-up in co-ownership, in which legal partition is the only remedy to force a sale, proceeded as if a sale of the asset could be effected at any time at a fixed price if the cotenants agree. Here we utilize the more realistic assumption that potential buyers appear intermittently (in accord with a Poisson process and that the price offered is drawn from a specified distribution). In applying the Nash bargaining solution, we select the disagreement point in accord either with Nash's methodology of rational threats or with reservation values. While neither methodology for selecting the disagreement point produces a credible threat when the agents incur legal costs, we argue that the rational threats approach produces more reasonable answers. Our main analysis considers the impact of a Poisson arrival of offers and an exponential time to court upon the optimal bargaining strategies of the cotenants.