A Little Is Not Enough: How the Degree of Flexibility Affects Resource Allocation

41 Pages Posted: 22 Jan 2020 Last revised: 11 Apr 2021

See all articles by Ankur Chavda

Ankur Chavda

HEC Paris - Strategy & Business Policy

Date Written: April 22, 2020

Abstract

Investment flexibility is often viewed as a straightforward tradeoff between uncertainty and competition: the ability to prematurely terminate unpromising investments mitigates environmental uncertainty while inflexibly committing to investments improves a firm’s competitive position. However, this approach to flexibility focusing on external factors ignores flexibility’s effect on internal incentives and behaviors. This study explores the relationship between one such behavior, the initial allocation of firm resources to an investment, and the probability an investment will be terminated, in other words, the degree of flexibility. Backed by an empirical analysis of new television programs, I argue low degrees of flexibility can be detrimental to investment outcomes, as any gains from selecting the best investments for completion is outweighed by the reduction in resources allocated to those investments.

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

Suggested Citation

Chavda, Ankur, A Little Is Not Enough: How the Degree of Flexibility Affects Resource Allocation (April 22, 2020). 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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