A Little Is Not Enough: How the Degree of Flexibility Affects Resource Allocation
41 Pages Posted: 22 Jan 2020 Last revised: 11 Apr 2021
Date Written: April 22, 2020
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: Suggested Citation