IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v183y2019icp344-383.html
   My bibliography  Save this article

Strategic real options

Author

Listed:
  • Kolb, Aaron M.

Abstract

I study hidden investment in quality in a dynamic persuasion game. A seller, such as a project manager or startup company, controls an asset and wants to convince a potential buyer, such as an acquiring company or a regulator, that it has high quality. The buyer observes exogenous news with quality-dependent drift and holds a call option on the asset; the seller is privately informed about quality and can wait (at a flow cost), upgrade (at a fixed cost) or exit the market.

Suggested Citation

  • Kolb, Aaron M., 2019. "Strategic real options," Journal of Economic Theory, Elsevier, vol. 183(C), pages 344-383.
  • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:344-383
    DOI: 10.1016/j.jet.2019.05.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053118302576
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jet.2019.05.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mira Frick & Yuhta Ishii, 2015. "Innovation Adoption by Forward-Looking Social Learners," Cowles Foundation Discussion Papers 1877, Cowles Foundation for Research in Economics, Yale University.
    2. Sander Heinsalu, 2017. "Good signals gone bad: dynamic signalling with switching efforts," Papers 1707.04699, arXiv.org.
    3. Emir Kamenica & Matthew Gentzkow, 2011. "Bayesian Persuasion," American Economic Review, American Economic Association, vol. 101(6), pages 2590-2615, October.
    4. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1611-1633.
    5. Emeric Henry & Marco Ottaviani, 2019. "Research and the Approval Process: The Organization of Persuasion," American Economic Review, American Economic Association, vol. 109(3), pages 911-955, March.
    6. Heinsalu, Sander, 2017. "Good signals gone bad: Dynamic signalling with switched effort levels," Journal of Mathematical Economics, Elsevier, vol. 73(C), pages 132-141.
    7. Kolb, Aaron M., 2015. "Optimal entry timing," Journal of Economic Theory, Elsevier, vol. 157(C), pages 973-1000.
    8. Dirk Bergemann & Ulrigh Hege, 2005. "The Financing of Innovation: Learning and Stopping," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 719-752, Winter.
    9. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    10. Sircar, Ronnie & Xiong, Wei, 2007. "A general framework for evaluating executive stock options," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2317-2349, July.
    11. Alexander Gairat & Vadim Shcherbakov, 2017. "Density Of Skew Brownian Motion And Its Functionals With Application In Finance," Mathematical Finance, Wiley Blackwell, vol. 27(4), pages 1069-1088, October.
    12. Strulovici, Bruno & Szydlowski, Martin, 2015. "On the smoothness of value functions and the existence of optimal strategies in diffusion models," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 1016-1055.
    13. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
    14. Andrew Atkeson & Christian Hellwig & Guillermo Ordoñez, 2015. "Optimal Regulation in the Presence of Reputation Concerns," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 415-464.
    15. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, vol. 80(4), pages 1433-1504, July.
    16. Faruk Gul & Wolfgang Pesendorfer, 2012. "The War of Information," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 707-734.
      • Gul, Faruk & Pesendorfer, Wolfgang, 2010. "The War of Information," Papers 9-13-2010, Princeton University, Research Program in Political Economy.
    17. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    18. O. Grigg & V. Farewell, 2004. "An overview of risk‐adjusted charts," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 167(3), pages 523-539, August.
    19. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
    20. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 231-251.
    21. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    22. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2005. "Investment Timing Under Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 30(2), pages 472-500, May.
    23. Gonzalo Cisternas, 2018. "Career Concerns and the Nature of Skills," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 152-189, May.
    24. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Joyee Deb & Aniko Oery & Kevin R. Williams, 2018. "Aiming for the Goal: Contribution Dynamics of Crowdfunding," Cowles Foundation Discussion Papers 2149R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2023.
    2. Gonzalo Cisternas & Aaron Kolb, 2020. "Signaling with Private Monitoring," Papers 2007.15514, arXiv.org.
    3. Raphael Boleslavsky, 2023. "Waiting for Fake News," Papers 2304.04053, arXiv.org, revised Apr 2023.
    4. Lang, Ruitian, 2019. "Try before you buy: A theory of dynamic information acquisition," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1057-1093.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Chia-Hui & Ishida, Junichiro, 2018. "Hierarchical experimentation," Journal of Economic Theory, Elsevier, vol. 177(C), pages 365-404.
    2. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    3. Marina Halac & Ilan Kremer, 2020. "Experimenting with Career Concerns," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 260-288, February.
    4. Keller, Godfrey & Rady, Sven, 2015. "Breakdowns," Theoretical Economics, Econometric Society, vol. 10(1), January.
    5. Chia-Hui Chen & Junichiro Ishida, 2017. "Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns," ISER Discussion Paper 0994, Institute of Social and Economic Research, Osaka University.
    6. Dilmé, Francesc, 2019. "Dynamic quality signaling with hidden actions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 116-136.
    7. Bonatti, Alessandro & Hörner, Johannes, 2017. "Career concerns with exponential learning," Theoretical Economics, Econometric Society, vol. 12(1), January.
    8. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, vol. 80(4), pages 1433-1504, July.
    9. Fahn, Matthias, 2011. "Three Essays on Commitment and Information Problems," Munich Dissertations in Economics 13750, University of Munich, Department of Economics.
    10. Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2014. "On the genesis of multinational foreign affiliate networks," European Economic Review, Elsevier, vol. 65(C), pages 136-163.
    11. Grenadier, Steven R. & Malenko, Andrey & Strebulaev, Ilya A., 2014. "Investment busts, reputation, and the temptation to blend in with the crowd," Journal of Financial Economics, Elsevier, vol. 111(1), pages 137-157.
    12. Ke, T. Tony & Villas-Boas, J. Miguel, 2019. "Optimal learning before choice," Journal of Economic Theory, Elsevier, vol. 180(C), pages 383-437.
    13. Nishihara, Michi & Shibata, Takashi, 2018. "Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 118-137.
    14. Lang, Ruitian, 2019. "Try before you buy: A theory of dynamic information acquisition," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1057-1093.
    15. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    16. Alessandro Spiganti, 2022. "Wealth Inequality and the Exploration of Novel Alternatives," Working Papers 2022:02, Department of Economics, University of Venice "Ca' Foscari".
    17. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    18. Gürtler, Marc & Sieg, Gernot, 2006. "Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy," Working Papers FW24V2, Technische Universität Braunschweig, Institute of Finance.
    19. Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
    20. Nicolas Klein & Tymofiy Mylovanov, 2011. "Should the Flatterers be Avoided?," 2011 Meeting Papers 1273, Society for Economic Dynamics.

    More about this item

    Keywords

    Real options; Persuasion games; Hidden investment; Continuous time; Resetting barrier; Skew Brownian motion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:344-383. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.