Group-Managed Real Options

Lorenzo Garlappi, Ron Giammarino, Ali Lazrak
2021 The Review of financial studies  
We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative "median" member. As a result, members' disagreement generates inertia—the group delays investment relative to a single-agent case—and underinvestment—the group rejects projects that are supported by a majority
more » ... members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.
doi:10.1093/rfs/hhab100 fatcat:wdyebn5hbvdebmqmes2sobzauy