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The effects of costly exploration on optimal investment timing

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  • Nishihara, Michi
  • Shibata, Takashi
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    Abstract

    This paper investigates a principal-agent model in which an owner (principal) optimizes a contract with a manager (agent) who has been delegated to undertake an investment project. In the model, we explore the effects of costly exploration by which the manager learns the real value of development cost. We show that high exploration cost can lead to a pooling policy not contingent on project type. Further, and more notably, we show that, in the presence of asymmetric information, higher exploration cost leads to wealth transfer from owner to manager and can ultimately improve social welfare.

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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 20 (2011)
    Issue (Month): 3 (August)
    Pages: 105-112

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    Handle: RePEc:eee:revfin:v:20:y:2011:i:3:p:105-112

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Real options Asymmetric information Costly learning Sequential investment Incentive theory;

    References

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