On the Option Effects of Short-Time Work Arrangements

We analyse the short term work (STW) regulations that several OECD countries introduced after the 2007 financial crisis. We view these measures as a collection of real options and study the dynamic effect of STW on the endogenous liquidation decision of the firm. While STW delays a firm’s liquidation, it is not necessarily welfare enhancing. Moreover, it turns out that firms use STW too long. We show (numerically) that providers of capital benefit more than employees from STW. Benefits for employees can even be negative. A typical Nordic policy performs better than a typical Anglo-Saxon policy for all stakeholders

On the Firm’s Option Values of Short-Time Work Policies

We analyse the short-time work (STW) regulations that several OECD countries introduced after the 2007 financial crisis. We view these measures as a collection of real options and study the dynamic effect of STW on the endogenous liquidation decision of the firm. While STW delays a firm’s liquidation, it is not necessarily welfare enhancing. Moreover, it turns out that firms use STW too long. We show (numerically) that providers of capital benefit more than employees from STW. Benefits for employees can even be negative. A typical Nordic policy performs better than a typical Anglo-Saxon policy for all stakeholders

Real option analysis in a replicating portfolio perspective

In the last decades, a vast body of literature has arisen on real option analysis (ROA). The use of di¤erent approaches and the often implicit adoption of major assumptions may cause confusion on what ROA precisely entails, or in which situations it may be applied. We assess the �eld of real option analysis by explicitly linking ROA to the basic principles of option pricing theory and the replicating portfolio concept. From this perspective, we explain how real options adjust to the varying risk pro�les of a project, a feature not available in other valuation methods. We also clarify how non-market risks can be dealt with in ROA. We show that a combination of option pricing and decision tree analysis enables us to treat a broad range of investment problems, in a manner that is consistent with pricing theory

Real Options Models without Single-Investment Threshold Behavior

This paper investigates real options models that violate the assumption of positive persistence of uncertainty. Without this fundamental assumption, existing methodologies are inadequate to address the firm's investment problem. To tackle this issue, we introduce a discrete-time version of a real options model and employ reinforcement learning, specifically Q-learning, to derive the optimal solution. Our findings reveal that in scenarios where the assumption of positive persistence of uncertainty is violated, the firm's investment behavior can exhibit disconnected investment regions

Real Options Models without Single-Investment Threshold Behavior

This paper investigates real options models that violate the assumption of positive persistence of uncertainty. Without this fundamental assumption, existing methodologies are inadequate to address the firm's investment problem. To tackle this issue, we introduce a discrete-time version of a real options model and employ reinforcement learning, specifically Q-learning, to derive the optimal solution. Our findings reveal that in scenarios where the assumption of positive persistence of uncertainty is violated, the firm's investment behavior can exhibit disconnected investment regions

Product Innovation of an Incumbent Firm:A Dynamic Analysis

In case of a product innovation firms start producing a new product. While doing so, such a firm should decide what to do with its existing product after the firm has innovated. Essentially it can choose between replacing the established product by the new one, or keep on producing the established product so that it produces two products at the same time. The aim of this paper is to design a theoretical framework to analyze this problem. Due to technological progress the quality of the newest available technology, and thus the quality of the innovative product that can be produced by this technology, increases over time. The implication is that a later innovation enables the firm to produce a better innovative product. So, typically the firm faces the tradeoff between innovating fast, which boosts its profits soon but only by a small amount, or innovating later, which leads to a larger payoff increase. The drawback here is that the firm is stuck with producing the established product for a longer time. We fund that a highly uncertain economic environment makes the firm delay abolishing the old product market. But if the innovative market is more volatile, the firm enters the market sooner, provided it will be active on the old market, at least for some time. Moreover, the smaller the initial demand for the innovative product market, the better the quality of the innovative product needs to be for the product innovation to be optimal

Entry Deterrence by Timing Rather than Overinvestment in a Strategic Real Options Framework

Huberts NFD, Dawid H, Huisman K, Kort PM. Entry Deterrence by Timing Rather than Overinvestment in a Strategic Real Options Framework. Working Papers in Economics and Management. Vol 02-2015. Bielefeld: Bielefeld University, Department of Business Administration and Economics; 2015.This paper examines a dynamic incumbent-entrant framework with stochastic evolution of the (inverse) demand, in which both the optimal timing of the investments and the capacity choices are explicitly considered. We find that the incumbent invests earlier than the entrant and that entry deterrence is achieved through timing rather than through overinvestment. This is because the incumbent invests earlier and in a smaller amount compared to a scenario without potential entry. If, on the other hand, the capacity size is exogenously given, the investment order changes and the entrant invests before the incumbent does