Optimal Project Allocation with an Asymmetric Liquidation Option

19 Pages Posted: 22 Aug 2017 Last revised: 24 Mar 2018

See all articles by Nir Sharon

Nir Sharon

Princeton University

Jonathan Zandberg

Boston College - Carroll School of Management

Date Written: August 17, 2017

Abstract

The article derives the optimal allocation of projects when two firms are engaged in a strategic alliance with an asymmetric liquidation option. Our model solves for the optimal allocation when a manager can liquidate the internally managed project and reallocate the funds to the alliance but has no control over the alliance's assets. We find the somewhat surprising result, which in some cases the probabilities of success of the two projects are irrelevant to the initial allocation of the projects. Finally, we parametrize our model and demonstrate graphically how the choice of projects vary across the various scenarios.

Keywords: Corporate Finance, Conglomerate, Internal Capital, Resource Allocation, Strategic Alliance

JEL Classification: D81, D86, G30, G39, L24

Suggested Citation

Sharon, Nir and Zandberg, Jonathan, Optimal Project Allocation with an Asymmetric Liquidation Option (August 17, 2017). Available at SSRN: https://ssrn.com/abstract=3020968 or http://dx.doi.org/10.2139/ssrn.3020968

Nir Sharon

Princeton University ( email )

Washington Road
Princeton, NJ 08544
United States

Jonathan Zandberg (Contact Author)

Boston College - Carroll School of Management ( email )

Chestnut Hill, MA
United States
919-699-3730 (Phone)

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