Hybrid or Electric Vehicles? A Real Options Perspective

This paper investigates the decision of an automaker concerning the alternative promotion of a hybrid vehicle (HV) and a full electric vehicle (EV). We evaluate the HV project by considering the option to change promotion from the HV to the EV in the future. The results not only extend previous findings concerning American options on multiple assets, but also include several new implications. One notable observation is that the increased market demand for EVs can accelerate the promotion of the HV because of the embedded option.real options, American options on multiple assets, exercise region, alternative projects, hybrid and electric vehicles.

Preemptive Investment Game with Alternative Projects

This paper derives a preemptive equilibrium in strategic investment in alternative projects. The problem is formulated in a real options model with a multidimensional state variable that represents project-specific uncertainty. The proposed method enables us to evaluate the value of potential alternatives. The results not only extend previous studies with a one-dimensional state variable but also reveal new findings. Preemptive investment takes place earlier and the project value becomes lower if the numbers of both firms and projects increase by the same amount. Interestingly, a strong correlation among profits from projects, unlike in a monopoly, plays a positive role in moderating preemptive competition.strategic real options, preemption, alternative projects, stopping game.

Real Options Valuation of Abandoned Farmland

I investigate the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I find that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. I also observe that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.real option, abandoned farmland, land development, land conversion.

A model for determining whether a firm should exercise multiple real options individually or simultaneously

We develop a model for determining whether a firm should exercise two real options individually or simultaneously. The simultaneous exercise of both options has positive synergy, such as economies of scale, scope, and networks, while separate exercise of each option benefits from project flexibility. This tradeoff determines the optimal exercise policy. We investigate the static and dynamic management of multiple real options. A firm under static management determines the type of exercise of real options ex ante; on the other hand, a firm under dynamic management makes the decision at the time of exercise. The analysis reveals the gap between the two styles of managing. Most importantly, we highlight the advantage of dynamic management over static management, particularly for weakly correlated markets. We also explain empirical implications regarding a firmfs entry into several countries and regions in Asia.multiple real options, optimal stopping, exercise region, entry into Asia

The effects of costly exploration on optimal investment timing

This paper investigates a principal-agent model in which an owner (principal) optimizes a contract with a manager (agent) delegated to undertake an investment project. In the model, we explore the effects of costly exploration by which the manager learns the real value of development cost. We show that high exploration cost can lead to a pooling policy not contingent on project type. Further, and more notably, we show that, in the presence of asymmetric information, higher exploration cost leads to wealth transfer from owner to manager and can then play a positive role in preventing a greedy contract by the owner and improving social welfare.Real Options; Asymmetric Information; Costly Learning; Sequential Investment; Incentive Theory

Investment timing with fixed and proportional costs of external financing

We develop a dynamic model in which a firm exercises an option to expand production with cash balance and costly external funds. While related papers explain their results only by numerical examples, we analytically prove the following results. In the presence of only a proportional cost of external financing, the firm with more cash balance invests earlier; however, the presence of both proportional and fixed costs leads to a non-monotonic relation between the investment time and cash balance. The firm with more cash balance invests later to save a fixed cost, particularly when the cash balance is close to the investment cost. Our results can potentially account for a variety of empirical results concerning the relation between investment volume and financing constraints.Real options; investment timing; costly external financing; growth option; optimal stopping.

Hybrid or Electric Vehicles? A Real Options Perspective

This paper investigates the decision of an automaker concerning the alternative promo-tion of a hybrid vehicle (HV) and a full electric vehicle (EV). We evaluate the HV project by considering the option to change promotion from the HV to the EV in the future. The results not only extend previous findings concerning American options on multiple assets, but also include several new implications. One notable observation is that the increased market demand for EVs can accelerate the promotion of the HV because of the embedded option