Group-Managed Real Options
We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative “median” member. As a result, members’ disagreement generates inertia -the group delays investment relative to a single-agent case-and underinvestment -the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.
Co-Author(s): Lorenzo Garlappi, Ron Giammarino, Ali Lazrak