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Real options with ex-post division of the surplus

Enrico Pennings ()

Journal of Banking & Finance, 2017, vol. 81, issue C, 200-206

Abstract: This paper examines a real option model where two vertically related firms are involved in a specific investment project that is subject to an uncertain payoff. While ex-post bargaining between a seller and a buyer leads to underinvestment by the seller in a standard model where timing of the seller’s investment is exogenous, we show that this need not be the case when the seller’s timing of investment is endogenous. However, bargaining with a buyer leads to excessive waiting. More severe holdup and higher uncertainty will lead to vertical integration of activities to avoid timing inefficiencies.

Keywords: Real options; Irreversible investments; Vertical relations; Bargaining (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jbfina:v:81:y:2017:i:c:p:200-206