The authors sincerely appreciate the comments made by Ramón Casadesús, Rafael Repullo and Fran Ruiz on earlier versions of the paper. They also gratefully acknowledge the suggestions made by an anonymous referee, and the financial support from Project MICINN-ECO2010-21393-C04-04.
Options in Agency with Binary Uncertainty
Article first published online: 22 MAY 2013
© 2013 John Wiley & Sons Ltd and The University of Manchester
The Manchester School
Volume 82, Issue 2, pages 218–236, March 2014
How to Cite
Gutiérrez, Ó. and Salas-Fumás, V. (2014), Options in Agency with Binary Uncertainty. The Manchester School, 82: 218–236. doi: 10.1111/manc.12008
- Issue published online: 17 FEB 2014
- Article first published online: 22 MAY 2013
- Manuscript Revised: 16 JAN 2013
- Manuscript Received: 20 DEC 2011
This paper uses a stylized agency model to evaluate the economic efficiency of options contracts when pay-off uncertainty is bimodal, a situation rather common when projects either ‘fail’ or ‘succeed’. We find that ‘options’ are strictly preferred to ‘stock’ (i.e. linear contracts) when output uncertainty is large, i.e. when the spread between the modes of the pay-off distribution is sufficiently high.