REAL OPTIONS IN PARTNERSHIP DEALS: THE PERSPECTIVE OF COOPERATIVE GAME THEORY

In this paper we consider partnership deals under un- certainty but with downstream flexibility. We confine ourselves to bilateral deals and focus on the eect of options on the synergy set, the 'core', of a partnership deal. We distinguish between co- operative options, which are exercised jointly and in the interest of maximizing the total deal value, and non-cooperative options, which are exercised unilaterally in the interest of one partner's pay- o. We provide a simple framework that illustrates options eects in a two-stage model. The model can be readily extended to a binomial lattice. We investigate options eects in the presence of risk-aversion and in the presence of complete markets.

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