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The Economic Value of Flexibility When There is Disagreement

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  • Thakor, Anjan
  • Boot, Arnoud

Abstract

We develop an economic theory of ?flexibility?, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decision-maker, and can be valued as such. The value of the flexibility option is decreasing in the extent to which the decision-maker?s future decision-relevant opinion is correlated with the opinions of others who may be able to impede the decision. We argue that flexibility drives economic decisions in a significant way. The applications we consider are: the entrepreneur?s choice of flexibility in the initial mix of financing raised; the use of flexibility to understand differences in security design and the firm?s security-issuance decision; the impact of flexibility on the use of collateral in lending; the role of flexibility in capital budgeting decisions; the effect of flexibility considerations in the design of contracts in a principal-agent setting; the interpretation of ?power? and conformity in organizations in the context of flexibility; and the choice between private and public ownership in the context of flexibility.

Suggested Citation

  • Thakor, Anjan & Boot, Arnoud, 2003. "The Economic Value of Flexibility When There is Disagreement," CEPR Discussion Papers 3709, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3709
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    Cited by:

    1. Arnoud W.A. Boot & Anjan V. Thakor, 2003. "Disagreement and Flexibility: A Theory of Optimal Security Issuance and Capital Structure," Tinbergen Institute Discussion Papers 03-001/2, Tinbergen Institute.
    2. Mark Pyles & Donald Mullineax, 2008. "Constraints on Loan Sales and the Price of Liquidity," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 21-36, February.
    3. Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
    4. Massimo Omiccioli, 2005. "Trade Credit as Collateral," Temi di discussione (Economic working papers) 553, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Corporate finance; Managerial decision-making;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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