A BEJEAP Topics article.

Abstract

In this paper, limited managerial capacity gives rise to a timing option: agents can implement projects now-or-later. Because each agent cares only about the project he implements, while the principal cares about the projects undertaken in aggregate, the timing option may be valued differently by the principal and the agents. Under a fair assignment rule (one that treats the agents symmetrically), these conflicting valuations result in agents sometimes not implementing the principal's desired projects. We identify conditions under which the optimal assignment rule necessarily exhibits favoritism. Favoritism is beneficial because it provides appropriate incentives to the unfavored agent by reducing his option value of waiting.

Submitted: July 11, 2003 · Accepted: September 18, 2003 · Published: December 1, 2003

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Arya, Anil and Glover, Jonathan (2003) "Real Options, Conflicting Valuations, and Favoritism," Topics in Economic Analysis & Policy: Vol. 3 : Iss. 1, Article 17.
Available at: http://www.bepress.com/bejeap/topics/vol3/iss1/art17