Goal Congruence and Real Options: Good News About Models with Bad News

44 Pages Posted: 19 Oct 2017

See all articles by Dmitry Livdan

Dmitry Livdan

University of California, Berkeley

Alexander Nezlobin

University of California, Berkeley - Haas School of Business

Date Written: October 16, 2017

Abstract

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.

Suggested Citation

Livdan, Dmitry and Nezlobin, Alexander, Goal Congruence and Real Options: Good News About Models with Bad News (October 16, 2017). Available at SSRN: https://ssrn.com/abstract=3055506 or http://dx.doi.org/10.2139/ssrn.3055506

Dmitry Livdan (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building, #1900
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Berkeley, CA 94720
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(510) 642-4733 (Phone)

Alexander Nezlobin

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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