Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78386
Authors: 
Lülfesmann, Christoph
Year of Publication: 
2001
Series/Report no.: 
Bonn Econ Discussion Papers 27/2001
Abstract: 
The paper investigates a model where two parties sequentially invest in a joint project (an asset). Investments and the project value are unverifiable, and A is wealth constrained so that an initial outlay must be financed by either agent B or an external investor C, say a bank. We show that an option contract in combination with a loan arrangement facilitates first best investments and any distribution of surplus if renegotiation is infeasible. Moreover, the optimal strike price of the option is shown to differ across financing modes. If renegotiation is admitted, the first best can still be attained unless A's bargaining position is too strong. Otherwise, B financing or C financing may become strictly preferable, and a combination of multiple lenders may be optimal.
Subjects: 
Option Contracts
Corporate Finance
Sequential Investments
Double Moral Hazard
JEL: 
D23
H57
L51
Document Type: 
Working Paper

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