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The effects of costly exploration on optimal investment timing

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  • Michi Nishihara
  • Takashi Shibata

Abstract

This paper investigates a principal–agent model in which an owner (principal) optimizes a contract with a manager (agent) who has been delegated to undertake an investment project. In the model, we explore the effects of costly exploration by which the manager learns the real value of development cost. We show that high exploration cost can lead to a pooling policy not contingent on project type. Further, and more notably, we show that, in the presence of asymmetric information, higher exploration cost leads to wealth transfer from owner to manager and can ultimately improve social welfare.

Suggested Citation

  • Michi Nishihara & Takashi Shibata, 2011. "The effects of costly exploration on optimal investment timing," Review of Financial Economics, John Wiley & Sons, vol. 20(3), pages 105-112, August.
    • Handle: RePEc:wly:revfec:v:20:y:2011:i:3:p:105-112
    DOI: 10.1016/j.rfe.2011.06.001
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    1. Abdelhafid Benamraoui & Yousef Alwardat, 2019. "Asymmetric Information and Islamic Financial Contracts," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(1), pages 96-108, January.

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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