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on Project, Program and Portfolio Management |
| By: | Martin Szydlowski |
| Abstract: | I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project execution which depends on both a project’s NPV as well as its signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, current firm size and the agent’s continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice will depend more on the NPV and less on the signal to noise ratio. I show that the optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion. |
| JEL: | D86 G11 G31 G32 M12 M52 |
| Date: | 2011–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1525&r=ppm |
| By: | Beyer, Mila; Czarnitzki, Dirk; Kraft, Kornelius |
| Abstract: | Principle-agent theory suggests managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers might over-invest into innovation for reasons of growth implying higher remuneration, power and prestige. Using a sample of 1,406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared to owners giving rise to the risk argument. Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. Thus, managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career, and hence tend to over-invest into innovation. -- |
| Keywords: | corporate governance,managerial ownership,entrenchment,innovation,R&D investments |
| JEL: | G32 O31 O32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:11026&r=ppm |
| By: | Debernardi, Andrea; Grimaldi, Raffaele; Beria, Paolo |
| Abstract: | The assessment of infrastructure investments is often affected by inaccuracy in traffic forecasting, optimism bias and overvaluation of expected benefits. In general, even when such misrepresentation is not strategically introduced by proponents to push their projects, valuators and decision makers must cope with the existence of a risk of demand levels below expectations and consequent problem of overinvestment. In this sense, the concept of option value suggests that flexible or reversible projects may have a higher economic net present value compared with rigid schemes characterised by sunk costs. However, conventionally used cost benefit analysis (CBA) is very seldom used to manage such problem due to the complexity of the issue (for example when introducing a complete risk analysis). Moreover, such CBAs are still conceived as a static tool to decide ex-ante about an investment. In this paper we develop a theoretical framework and a practical application of CBA to formally manage such uncertainty and help the decision makers by postponing some decisions to the following running phase. The idea is to assess the project as split into smaller functional sections and bind the construction of a further section to the compliance of a pre-determined “switching rule”. In practical terms, we adapt a normal CBA procedure to manage also the time dimension of time of investments to reallocate risks already in the early design stage of transport infrastructures. The purpose of the paper is twofold. Firstly, we introduce a way to extend conventional CBA methodology to manage the phasing of projects. Secondly, we demonstrate both theoretically (with a simplified model) and practically (with a more complex case study) the positive effect of phasing under certain conditions (limitedness of sunk-costs due to phasing, predominance of capacity problems). By numerically developing the CBA of the Turin – Lyon high speed rail project, we show how to reduce the risk of overestimation of traffic and its positive effect in terms of NPV of the project: if forecasts are optimistic, only the most effective parts of the scheme will be built. If the traffic forecasts are correct, the new infrastructure will be built as a whole in steps and will generate the highest net benefits. |
| Keywords: | cost benefit analysis; option value; optimism bias; strategic misrepresentation; benefit shortfall; planning fallacy; forecasting |
| JEL: | H54 L92 R42 D61 |
| Date: | 2011–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30327&r=ppm |
| By: | Tiago Freire; Vernon Henderson; Ari Kuncoro |
| Abstract: | Using three waves of survey data from fishing villages in Aceh, Indonesia for 2005-2009, we examine the determinants of local volunteer labor after the tsunami. Pre-existing social capital and the form of aid delivery (but not trauma) strongly affect village volunteerism initially, but these effects weaken with time. What persists is the effect of essentially a new institution, formal village elections. While recent work suggests democratization increases cooperation, the differentially timed introduction of elections negatively affects volunteerism, suggesting a regime switch effect where traditional leaders chosen by elites want more volunteer labor projects than democratically elected leaders do. |
| Keywords: | # |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2011-8&r=ppm |