Intertemporal Decision-Making and the Nash Bargaining Solution
15 Pages Posted: 11 Jun 2018
Date Written: May 26, 2018
Most applications of real options analysis assume a single decision-maker uses flexibility to maximize a firm's market value. This paper presents an alternative approach suitable for firms with two utility-maximizing decision-makers who have joint responsibility for setting firm policies. In this approach the Nash bargaining solution is used to determine the outcome at each date in a way that ensures policies are dynamically consistent. It is illustrated using resource-extraction and liquidity-management problems.
Keywords: Real Options, Nash Bargaining Solution, Dynamic Consistency, Resource Extraction, Liquidity Management
JEL Classification: C78, D25, G31, G32, G34, G35, Q31
Suggested Citation: Suggested Citation