The Value Of Flexibility And Its Impacts On Firms' Decision-Making

Through the review of literature on flexibility, this paper abstracts the essential properties of flexibility, i.e. range and speed. Base on this, this paper generally provides the mathematical definition of flexibility, builds a model of flexible decision-making, analyzes the values of range and response flexibilities, and develops the comparative statics of optimal decisions with respect to information observed. Furthermore, we apply the general results on the relationships among flexibilities, information, values and the decision-making behavior to the context of the firm, and examine the impact of various flexibilities on firm's decision making. More concretely, we get the following main innovative conclusions.(1) In Chpter 2, this paper theoretically proves a basic proposion that the value of a decision alternative increases as its flexibility increases. Furthermore, we analyze the relationship between optimal decisions and the observed information, i.e. the comparative statics of optimal decisions with respect to information observed. The results show that under certain technical assumptions, the supermodularity of decision-maker's benefit (e.g. revenue) function, which represents the complemantarity between decision alternatives and exogenous states, implies that the changes of optimal decisions and the observed exogenous states are in the same direction. In contrast, the sumodularity of decision-maker's benefit function, which represents the substitution property between decision alternatives and exogenous states, implies that the changes of optimal decisions and the observed exogenous states are in the opposite directions.(2) We apply the general flexible decision-making model and the results derived from it to firm's typical decision-making contexts and draw the following conclusions.1) In the context of firm's technology and production organizing, Chapter 3 proves that a technology with higher level of flexibility values more than one with lower level of flexibility and a more flexibible production-organizing system has a higher value than a less flexible one. This means that, other things constant, firm's value depends not only on its "hard" technology (about the question of what assets a firm has), but also on its "soft" production-organizing system (about the question of how to utlize its assets).