Goal Congruence and Real Options: Good News About Models with Bad News
44 Pages Posted: 19 Oct 2017
Date Written: October 16, 2017
Existing capital accumulation models that show that goal congruence is achievable for sequential investment decisions rely on the assumption that the firm is operating in an ever-expanding product market. The good news is that this result can be extended to a setting with possible bad news about the product market conditions. We present an analytically tractable, discrete time capital accumulation model with irreversible investment in capital goods with arbitrary efficiency profiles, and show that there exist multiple combinations of accrual accounting rules and performance measures that result in goal congruent incentives for a better informed manager. Even the simplest rules, such as straight-line depreciation, can facilitate goal congruence in a dynamic investment model with growth options.
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