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The effects of costly exploration on optimal investment timing

  • Michi NISHIHARA

    ()

    (Graduate School of Economics, Osaka University)

  • Takashi SHIBATA

    ()

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

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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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
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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