Belief Polarization and Investment
41 Pages Posted: 15 Mar 2019
Date Written: February 15, 2019
We study a canonical real option model where the decisions to acquire and abandon an option are made sequentially by a group of agents with heterogeneous beliefs. Applying results from the political economy literature on spatial voting, we show that when the group mediates disagreement through voting, inefficient underinvestment can occur: although each group member would acquire the option if he had post-acquisition control rights, the group votes against acquisition. We show that this inefficiency occurs when group members' beliefs are polarized, that is, divided into two opposing factions of equal size. Given the pervasive nature of group decisions in the life of organizations and institutions, our theory is particularly relevant for the behavior of venture capitalists, financing syndicates, corporate boards, and committees at large.
Keywords: group decisions, dynamic voting, real investment
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