Dynamic Project Selection

Arina Nikandrova and Romans Pancs
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Arina Nikandrova: Department of Economics, Mathematics & Statistics, Birkbeck

No 1505, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We study a normative model of an internal capital market, used by a company to choose between its two divisionsÂ’ pet projects. Each projectÂ’s value is initially unknown to all but can be dynamically learned by the corresponding division. Learning can be suspended or resumed at any time and is costly. We characterize an internal capital market that maximizes the companyÂ’s expected cash flow. This market has indicative bidding by the two divisions, followed by a spell of learning and then firm bidding, which occurs at an endogenous deadline or as soon as either division requests it.

Keywords: Internal Capital Market; Irreversible Project Selection. (search for similar items in EconPapers)
JEL-codes: D82 D83 G31 G32 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cfn, nep-mic and nep-ppm
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https://eprints.bbk.ac.uk/id/eprint/15274 First version, 2015 (application/pdf)

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Journal Article: Dynamic project selection (2018)
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