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Compensation measures for alliance formation: A real options analysis

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  • Nishide, Katsumasa
  • Tian, Yuan

Abstract

This paper presents a real options model of alliance formation between two firms for entry into a new market. We analyze how different compensation measures affect the alliance timing and option values. Generally, when profit structures of the two firms before and after an alliance are different, their individually optimal alliance timings do not coincide. Therefore, achieving an agreement on a common alliance timing becomes an important issue. To promote alliance formation, we examine two feasible compensation measures provided by one firm to the other: share adjustment (flow compensation) and subsidy (lump-sum compensation). We find that subsidy induces an earlier alliance, although share adjustment is Pareto optimal in terms of the joint option value.

Suggested Citation

  • Nishide, Katsumasa & Tian, Yuan, 2011. "Compensation measures for alliance formation: A real options analysis," Economic Modelling, Elsevier, vol. 28(1-2), pages 219-228, January.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1-2:p:219-228
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    Cited by:

    1. Ketelaars, Martijn, 2024. "Clearing in financial networks and dynamic investment under uncertainty," Other publications TiSEM 94768fb9-fd72-405d-a330-6, Tilburg University, School of Economics and Management.
    2. Morreale, Azzurra & Robba, Serena & Lo Nigro, Giovanna & Roma, Paolo, 2017. "A real options game of alliance timing decisions in biopharmaceutical research and development," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1189-1202.
    3. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.

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    More about this item

    Keywords

    Real options Alliance Flow payment Lump-sum payment;

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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