“Ex-Post Bargaining and the Option Value of Waiting to Invest” by Enrico Pennings
Erasmus University Rotterdam
This paper examines a real option model where two firms are needed to shape 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 the seller's level of investment matches the level of investment of an integrated firm when the seller's timing of investment is endogenous. Though flexibility in timing leads to efficient levels of investment, another inefficiency appears in the form of excessive waiting. Several extensions of the model are examined in order to check the robustness and implications of the results.