Temporary workers as real options

Abstract Firms experiencing or anticipating substantial workforce expansion face increasing pressure to accurately project the costs associated with human asset investments and potential future layoff requirements. With that in mind, the decision whether to take on temporary workers in lieu of hiring permanent employees is a decision that involves significant risk. Traditional valuation methods assume that investments are fully reversible and thus do not capture the idiosyncrasies of workforce management, in which investments are not fully reversible. However, real options theory offers managers the ability to consider irreversibility and to make workforce investment decisions under conditions of minimum uncertainty and maximum flexibility. We present real options theory as an especially useful means for managers to more accurately value human asset investment decisions, achieve expansion and defer commitment until future uncertainties can be at least partially resolved.

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