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Optimal bid for a company worth double to you

Question

A company's current value VV is uniformly distributed on [0,1][0,1]; you do not know VV, but the owner does. You make a single take-it-or-leave-it offer bb. The owner accepts only if b≥Vb\ge V, and once you own the firm its value becomes 2V2V. Which bid bb maximises your expected profit?

Short answer

Every bid earns zero in expectation, so you gain nothing by bidding (bid 00). An accepted bid bb tells you V∼U[0,b]V\sim U[0,b], so the firm is worth 2⋅b2=b2\cdot\tfrac b2=b to you on average, exactly what you paid: expected profit is ∫0b(2v−b) dv=0\int_0^b(2v-b)\,dv=0. With any value uplift below 100%100\% every positive bid loses money (the winner's curse).

Adapted from Crack, Heard on the Street, Q1.50, p.19; question and answer rewritten by SelfMadeQuant.com.

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