The effects of costly exploration on optimal investment timing

Michi Nishihara () and Takashi Shibata ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 10-27, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: 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.

Keywords: Real Options; Asymmetric Information; Costly Learning; Sequential Investment; Incentive Theory (search for similar items in EconPapers)
JEL-codes: D86 G13 G31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-11
New Economics Papers: this item is included in nep-cta and nep-ppm
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http://www2.econ.osaka-u.ac.jp/library/global/dp/1027.pdf (application/pdf)

Related works:
Journal Article: The effects of costly exploration on optimal investment timing (2011)
Journal Article: The effects of costly exploration on optimal investment timing (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1027

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