The impact of tracking costs on real options

Óscar Gutiérrez

The Engineering Economist, 2024, vol. 69, issue 4, 241-254

Abstract: This article presents a real options model that explicitly takes into account the tracking costs required to follow the evolution of an investment opportunity. We find the impacts of tracking costs on investment timing are far from negligible. For typical parameter configurations, tracking costs lead to consequential corrections to the standard solution. In addition, the option to discard the investment opportunity becomes relevant. The impact of tracking costs on investments is more evident for low levels of volatility. In some cases, the optimal policy is similar to the Net Present Value rule.

Date: 2024
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DOI: 10.1080/0013791X.2024.2438145

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