Investment Timing with Incentive-Disincentive Contracts under Asymmetric Information

Takashi Shibata, Michi Nishihara

Graduate School of Economics, Osaka University, Osaka, Japan.
Graduate School of Social Sciences, Tokyo Metropolitan University, Tokyo, Japan.

DOI: 10.4236/ti.2012.32011                

Abstract

This paper examines a manager’s investment timing in the presence of asymmetric information between an owner and the manager. In particular, we extend the asymmetric information problem by incorporating not only an incentive but also disincentive. Investment timing is delayed more under asymmetric information than under symmetric information. However, investment timing under asymmetric information converges to the symmetric information investment timing by making the disincentive (penalty) for the manager’s untruthful report sufficiently large. Consequently, by adopting an enlarged set of incentive-disincentive contracts framework, we showed that there is a relationship between the symmetric and asymmetric information problems.

Keywords

Real Options; Asymmetric Information; Incentive-Disincentive; Principal-Agent Problem

Conflicts of Interest

The authors declare no conflicts of interest.

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