A Little is Not Enough: How Flexibility Affects Resource Allocation and Outcomes

54 Pages Posted: 22 Jan 2020 Last revised: 25 Oct 2021

See all articles by Ankur Chavda

Ankur Chavda

HEC Paris - Strategy & Business Policy

Date Written: September 21, 2021

Abstract

This paper examines investment flexibility from a commitment perspective. Firms can choose to
make investments while retaining the option to terminate them prior to completion. This
flexibility can mitigate uncertainty about the investment present at the time of its initial funding.
However, this flexibility can also detrimentally alter actions within the firm that are necessary
for the investment’s success, such as whether scarce firm resources are allocated to the
investment. This paper uses a simple model to hypothesize that in some cases flexibility can
worsen investment outcomes relative to commitment by changing the level of allocated
resources, despite the potential benefits of flexibility. This hypothesis is empirically tested in a
dataset of new US television programs, comparing programs which receive commitment in the
form of a straight to series orders with programs which are flexibility developed through a
piloting process. This paper thus contributes to the growing literature exploring when firms
should flexibly invest.

Keywords: commitment, experimentation, new product development, television industry

JEL Classification: D24, D81, L23, L26, L82, M11, O31, O32

Suggested Citation

Chavda, Ankur, A Little is Not Enough: How Flexibility Affects Resource Allocation and Outcomes (September 21, 2021). HEC Paris Research Paper, No. SPE-2019-1357, Available at SSRN: https://ssrn.com/abstract=3477199 or http://dx.doi.org/10.2139/ssrn.3477199

Ankur Chavda (Contact Author)

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France

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