Real Options with Ex-Post Division of the Surplus

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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.
Original languageEnglish
Pages (from-to)200-206
Number of pages7
JournalJournal of Banking and Finance
Volume81
DOIs
Publication statusPublished - 18 Oct 2016

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