Investment Strategies And Contract Mechanism Under The Perspective Of Real Options

This dissertation is composed of six chapters, which cover a basic introduction, literature review, theoretical models and analyses, and a final summary. More details regarding these chapters are described as follows:The first chapter provides a description concerning research background and motivation, and highlights the significant contributions of this study.The second chapter carries out a review for relevant literature about optimal investment opportunities investigated by the real options models and game theories. Specifically, the literature has allowed for asymmetric competing firms, authoritarian mechanisms, and the implementation of steady economic growth targets and the strategies of local investments under uncertain environments.The third chapter develops a combined framework of real options and games within which two competing firms need to choose optimal investment strategies in the face of irreversible investment opportunities. Given the asymmetry of their investment costs and revenue flows, the research investigates the values of these two firms’investment options and strategic interaction of their investment decisions. Furthermore, this chapter also quantifies the relatively competitive advantages between the two firms, and obtains the analytical solutions to the conditions of the existence and the transformation of three different equilibriums.The fourth chapter attempts to develop a real options-based approach to investigate the important implication of authoritarian mechanisms for economic development under uncertain environments, from the respective perspectives of central and local governments. By defining the concepts of trans ferrable costs and authoritarian rents, the model can shed new light on why authoritarian mechanisms can accelerate the economic growth, and provide new insights on the incentive problem of "collusion" or side contracts between local governments and enterprises. In order to maximize the social welfare, from the perspective of the central government the chapter also allow for the optimal design of contract mechanisms between central and local governments. The model results show that when the negative social costs caused by transferred costs are relatively little and if the "collusion" or side contracts between local governments and enterprises are allowed, authoritarian mechanisms can play important roles in accelerating economic growth and making macroeconomic policies. Furthermore, the chapter also provides constructive proposals concerning the future economic development in mainland China.In the fifth chapter, under current uncertain economic environments steady economic growth has been one of the main targets of economic development in mainland China. This chapter therefore develops a continuous time principal-agent model to investigate the relationship between the central government and the subordinate government chief executives, in order to provide new insights about how to align local governments’ strategies and actions with the central government’s economic development targets. Our model derives the central government’ optimal incentive contract terms under information asymmetry, whose incentive targets are to make these chief executives tell the truth about their economic development efforts and to realize the maximization of social welfare.The final chapter summarizes this research and proposes further future research directions.