This question derives from chapter 10 from Managerial Uses of Accounting Information. http://link.springer.com/book/10.1007/978-0-387-77451-0

Patrick wants to purchase a family heirloom from a neighbor. The heir- loom has private value to the neighbor denoted v. Neighbor knows v; Ralph only knows v is uniformly distributed between v = 0 and v = 100. Neighbor knows this about Patrick. Finally, whatever v is, the value of the heirloom to Patrick is 1.5v. Neighbor also knows this about Patrick.

(a) Who should own the heirloom, Patrick or neighbor?

(b) Suppose the trade encounter between the two individuals proceeds as follows. Patrick offers to purchase the heirloom at price P. If neighbor agrees, Patrick pays P in exchange for the heirloom. If neighbor does not agree, the game ends, and neighbor keeps the heirloom. Now, from Patrick perspective, what is the expected value (to Patrick) of the heirloom, before any conver- sation with neighbor? Conversely, suppose Ralph offers price P > 0 and neighbor accepts the offer; what now is the expected value (to Patrick) of the heirloom? (As an aside, if Patrick pays P for the heirloom, at what price will Patrick's accountant value the heirloom?)

(c) What is the equilibrium in this game? Why does no trade take place, despite the fact Patrick is known to value the object higher than the neighbor?

(d) How does the analysis change if Patrick hires an auditor (assessor) to examine the heirloom in advance of making a bid and the auditor reliably supplies high/low information? In other words, the auditor reports the heirloom is in good condition with value between 50 and 100 or poor condition with value between 0 and 50.