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Options in Agency with Binary Uncertainty

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  • Óscar Gutiérrez
  • Vicente Salas-Fumás

Abstract

type="main"> This paper uses a stylized agency model to evaluate the economic efficiency of options contracts when pay-off uncertainty is bimodal, a situation rather common when projects either ‘fail’ or ‘succeed’. We find that ‘options’ are strictly preferred to ‘stock’ (i.e. linear contracts) when output uncertainty is large, i.e. when the spread between the modes of the pay-off distribution is sufficiently high.

Suggested Citation

  • Óscar Gutiérrez & Vicente Salas-Fumás, 2014. "Options in Agency with Binary Uncertainty," Manchester School, University of Manchester, vol. 82(2), pages 218-236, March.
    • Handle: RePEc:bla:manchs:v:82:y:2014:i:2:p:218-236
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