Options in agency with binary uncertainty

Óscar Gutiérrez, Vicente Salas-Fumás

Research output: Contribution to journalArticleResearchpeer-review

Abstract

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. © 2013 John Wiley & Sons Ltd and The University of Manchester.
Original languageEnglish
Pages (from-to)218-236
JournalManchester School
Volume82
Issue number2
DOIs
Publication statusPublished - 1 Mar 2014

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