Survey_LW_2006

Abstract

We consider a firm in a risk-neutral economy with an investment opportunity to expand an existing business field. For example, the firm needs to make a further investment in one particular area to bring its existing products or ideas to the market. The investment decision is intertwined with a choice of strategy, A, B or C. Strategy A is the first-best strategy. However, it is not contractible and provides the firm with the flexibility to switch to strategy C. Strategy B is the second-best strategy, it is less flexible than strategy A and contractible.