Option Value to Waiting Created by a Control Problem
Abstract
We study a principal-agent model in which there is an option to defer a capital project approval decision. A control (incentive) problem makes the option to wait valuable when it would not have been valuable otherwise. Deferring the project approval decision has both a cost and a benefit. The cost of waiting is that the agent’s uncertainty regarding future project cost realizations cannot be exploited. However, by delaying the first project’s approval decision, the principal can condition its approval on the agent's cost report of the second project. Such conditioning can be valuable in the provision of incentives because of a diversification effect.
Citation
Arya, A., and Jonathan Glover. "Option Value to Waiting Created by a Control Problem." Journal of Accounting Research 39, no. 3 (2001): 405-415.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.