Why Do Team Projects Progress Slowly? A Model Based on Strategic Uncertainty

Abstract

This paper analyzes the investment timing for team projects. Under demand uncertainty, it is valuable to maintain flexibility in future investment alternatives. However, one party's flexibility creates strategic uncertainty for another party, which causes the other party to choose a higher level of flexibility. This strategic complementarity leads to delays in investments in contrast to the case of accelerated investments for preemption. This strategic effect is also distinct from the free-rider problem because this study focuses on the second moment of payoffs. The model also provides a rational alternative to the status-quo bias in organizational decision-making.

Keywords: Flexibility, non-cooperative games, strategic complementarity, real options, coordination failure

JEL Classification: G31, L14, L24