How vertical relationships and external funding affect investment efficiency and timing?

Dimitrios Zormpas

2017 Papers from Job Market Papers

Abstract: In this paper we consider a potential investor who contemplates entering an uncertain new market under two conditions: i) a prerequisite for the project to take place is the purchase of a discrete input from an upstream firm with market power and ii) the completion of the investment is conditional on the participation of an investment partner who is willing to bear some of the investment cost receiving compensation in return. Using the real option approach, we find that the involvement of any of the two alien agents causes the postponement of the completion of the investment and we discuss how these timing discrepancies are reflected on the value of the option to invest in the project. We next analyze the synchronous effect of outsourcing and external funding both in a non-cooperative and in a cooperative (Nash bargaining solution) game-theoretic setting and we show how the endogeneity of the sunk investment cost affects the timing and the value of the option to invest in projects characterized by uncertainty and irreversibility.

JEL-codes: C61 D92 G30 (search for similar items in EconPapers)
Date: 2017-11-18
New Economics Papers: this item is included in nep-ppm
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