Pennings, E. (2017). Real Options with Ex-Post Division of the Surplus Journal of Banking and Finance, 81:200--206.
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Affiliated author
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Publication year2017
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JournalJournal of Banking and Finance
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{\textquoteright}s investment is exogenous, we show that this need not be the case when the seller{\textquoteright}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.