DP3709 The Economic Value of Flexibility When There is Disagreement
|Author(s):||Arnoud W A Boot, Anjan Thakor|
|Publication Date:||January 2003|
|Keyword(s):||corporate finance, Managerial decision-making|
|JEL(s):||D83, G30, G32|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3709|
We develop an economic theory of ?flexibility?, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decision-maker, and can be valued as such. The value of the flexibility option is decreasing in the extent to which the decision-maker?s future decision-relevant opinion is correlated with the opinions of others who may be able to impede the decision. We argue that flexibility drives economic decisions in a significant way. The applications we consider are: the entrepreneur?s choice of flexibility in the initial mix of financing raised; the use of flexibility to understand differences in security design and the firm?s security-issuance decision; the impact of flexibility on the use of collateral in lending; the role of flexibility in capital budgeting decisions; the effect of flexibility considerations in the design of contracts in a principal-agent setting; the interpretation of ?power? and conformity in organizations in the context of flexibility; and the choice between private and public ownership in the context of flexibility.