Intertemporal Decision-Making and the Nash Bargaining Solution

15 Pages Posted: 11 Jun 2018

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: May 26, 2018

Abstract

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

Guthrie, Graeme, Intertemporal Decision-Making and the Nash Bargaining Solution (May 26, 2018). Available at SSRN: https://ssrn.com/abstract=3185252 or http://dx.doi.org/10.2139/ssrn.3185252

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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