Real options and real value: The role of employee incentives to make specific knowledge investments

Publication Type

Journal Article

Publication Date

7-2008

Abstract

Real options reasoning emphasizes the strategic value of making flexible investments in a turbulent environment. Employees' investments in specific human capital are often critical to the success of a real option project, but the very flexibility that allows a firm to change course in response to new information also affects employees' incentives to make such specific human capital investments. We develop a model of real option investment that explicitly incorporates the role of employee incentives. The model suggests that the effect of investing in a real option project on employee incentives may be positive, further increasing the value of the project, or negative, sometimes more than offsetting the benefit of flexibility and resulting in reduced project value. Therefore, firms and managers should take into consideration the role of employee incentives when applying real options logic to investment decision making.

Keywords

real options, employee incentives, specific knowledge investments

Discipline

Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Management Journal

Volume

29

Issue

7

First Page

701

Last Page

721

ISSN

0143-2095

Identifier

10.1002/smj.681

Publisher

Wiley

Additional URL

https://doi.org/10.1002/smj.681

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