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Staged Financing with a Variable Return

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  • Smirnov Vladimir

    () (University of Sydney)

  • Wait Andrew

    () (University of Sydney)

Abstract

This paper explores the hold-up problem between two parties (an entrepreneur and an investor) when one of the parties (the entrepreneur) is unable to commit not to repudiate the initial contract. To mitigate hold-up we allow the parties to stage investments over time and derive the optimal investment path in a model that places no restrictions on the growth of collateral. Our model predicts that neither positive wealth of the entrepreneur nor the lack of discounting ensures that all profitable projects proceed. We also derive necessary and sufficient conditions for the project to be financeable when there are no costs of delay.

Suggested Citation

  • Smirnov Vladimir & Wait Andrew, 2007. "Staged Financing with a Variable Return," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-28, February.
  • Handle: RePEc:bpj:bejtec:v:7:y:2007:i:1:n:5
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    Cited by:

    1. repec:wly:mgtdec:v:38:y:2017:i:4:p:547-555 is not listed on IDEAS
    2. Dongsoo Shin & Sungho Yun, 2014. "Upfront versus staged financing: the role of verifiability," Quantitative Finance, Taylor & Francis Journals, vol. 14(6), pages 1069-1078, June.
    3. Stephen King & Rohan Pitchford, 2008. "Private or Public? Towards a Taxonomy of Optimal Ownership and Management Regimes," The Economic Record, The Economic Society of Australia, vol. 84(266), pages 366-377, September.

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