Optimal Project Allocation with an Asymmetric Liquidation Option
19 Pages Posted: 22 Aug 2017 Last revised: 24 Mar 2018
Date Written: August 17, 2017
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
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