Agency Contracts, Noncommitment Timing Strategies and Real Options

Keiichi Hori and Hiroshi Osano

The Japanese Economic Review, 2017, vol. 68, issue 4, No 6, 554 pages

Abstract: Abstract Given that an owner lacks the ability to commit to his or her timing decisions under a manager’s hidden action, we consider the optimal design of the contract and the owner’s optimal timing decisions. Using a real options approach, we show that, compared with the full commitment case, a higher (lower)-quality project is launched later than (at the same time as) the first-best case, whereas the replacement of the manager is (is not necessarily) made later if the hidden-action problem is severe enough (is not severe enough). Severance pay may serve to minimize the compensation for the manager’s loss of corporate control.

Keywords: D82; G30; G34; M51; M52 (search for similar items in EconPapers)
Date: 2017
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Journal Article: Agency Contracts, Noncommitment Timing Strategies and Real Options (2017)
Working Paper: Agency Contracts, Noncommitment Timing Strategies, and Real Options (2011)
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DOI: 10.1111/jere.12144

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