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The Economic Value of Flexibility when there is Disagreement

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Author Info
Arnoud W.A. Boot () (Faculty of Economics and Econometrics, University of Amsterdam)
Anjan V. Thakor () (University of Michigan Business School)

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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 decisionmaker, and can be valued as such. The value of the flexibility option is decreasing in the extent to which the decisionmaker’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 an public ownership in the context of flexibility.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-002/2.

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Date of creation: 07 Jan 2003
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Handle: RePEc:dgr:uvatin:20030002

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Related research
Keywords: Managerial Decision Making Corporate Finance.

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  31. repec:fth:prinin:389 is not listed on IDEAS
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  1. Boot, Arnoud W A & Thakor, Anjan, 2003. "Disagreement and Flexibility: A Theory of Optimal Security Issuance and Capital Structure," CEPR Discussion Papers 3708, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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