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Dynamic Project Selection

Author

Listed:
  • Arina Nikandrova

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Romans Pancs

    (University of Rochester)

Abstract

We study a normative model of an internal capital market, used by a company to choose between its two divisionsÂ’ pet projects. Each projectÂ’s value is initially unknown to all but can be dynamically learned by the corresponding division. Learning can be suspended or resumed at any time and is costly. We characterize an internal capital market that maximizes the companyÂ’s expected cash flow. This market has indicative bidding by the two divisions, followed by a spell of learning and then firm bidding, which occurs at an endogenous deadline or as soon as either division requests it.

Suggested Citation

  • Arina Nikandrova & Romans Pancs, 2015. "Dynamic Project Selection," Birkbeck Working Papers in Economics and Finance 1505, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:1505
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    File URL: https://eprints.bbk.ac.uk/id/eprint/15274
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    Cited by:

    1. Deimen, Inga & Wirtz, Julia, 2022. "Control, cost, and confidence: Perseverance and procrastination in the face of failure," Games and Economic Behavior, Elsevier, vol. 134(C), pages 52-74.
    2. Olivier Gossner & Jakub Steiner & Colin Stewart, 2021. "Attention Please!," Econometrica, Econometric Society, vol. 89(4), pages 1717-1751, July.
    3. Yeon-Koo Che & Konrad Mierendorff, 2019. "Optimal Dynamic Allocation of Attention," American Economic Review, American Economic Association, vol. 109(8), pages 2993-3029, August.
    4. Mayskaya, Tatiana, 2024. "Following beliefs or excluding the worst? The role of unfindable state in learning," European Economic Review, Elsevier, vol. 162(C).
    5. Christoph Carnehl & Johannes Schneider, 2021. "On Risk and Time Pressure: When to Think and When to Do," Papers 2111.07451, arXiv.org, revised Mar 2022.
    6. Herresthal, Claudia, 2022. "Hidden testing and selective disclosure of evidence," Journal of Economic Theory, Elsevier, vol. 200(C).

    More about this item

    Keywords

    Internal Capital Market; Irreversible Project Selection.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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