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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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Real Options, Conflicting Valuations, and Favoritism

Anil Arya
  • 1Ohio State University,
/ Jonathan Glover
  • 2Carnegie Mellon University,
Published Online: 2003-12-01 | DOI: https://doi.org/10.2202/1538-0653.1177

Abstract

In this paper, limited managerial capacity gives rise to a timing option: agents can implement projects now-or-later. Because each agent cares only about the project he implements, while the principal cares about the projects undertaken in aggregate, the timing option may be valued differently by the principal and the agents. Under a fair assignment rule (one that treats the agents symmetrically), these conflicting valuations result in agents sometimes not implementing the principal's desired projects. We identify conditions under which the optimal assignment rule necessarily exhibits favoritism. Favoritism is beneficial because it provides appropriate incentives to the unfavored agent by reducing his option value of waiting.

Keywords: timing option; favoritism


Published Online: 2003-12-01


Citation Information: Topics in Economic Analysis & Policy. Volume 3, Issue 1, ISSN (Online) 1538-0653, DOI: https://doi.org/10.2202/1538-0653.1177, December 2003

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