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The effects of costly exploration on optimal investment timing

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  • Michi NISHIHARA

    ()
    (Graduate School of Economics, Osaka University)

  • Takashi SHIBATA

    ()
    (Graduate School of Social Sciences, Tokyo Metropolitan University, Statistical Laboratory, University of Cambridge)

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    Abstract

    This paper investigates a principal-agent model in which an owner (principal) optimizes a contract with a manager (agent) 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 then play a positive role in preventing a greedy contract by the owner and improving social welfare.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1027.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 10-27.

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    Length: 24 pages
    Date of creation: Nov 2010
    Date of revision:
    Handle: RePEc:osk:wpaper:1027

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    Related research

    Keywords: Real Options; Asymmetric Information; Costly Learning; Sequential Investment; Incentive Theory;

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