Template-Type: ReDIF-Paper 1.0
Title: Limited Liability and Option Contracts in Models with Sequential Investments 
Author-Name: Christoph Lülfesmann 
Author-Email: 
Classification-JEL: D23, H57, L51 
Keywords: Option Contracts, Corporate Finance, Sequential Investments, Double Moral Hazard 
Abstract: The paper investigates a model where two parties sequentially invest in a joint project (an asset). Investments and the project value are unverifiable, and A is wealth
	constrained so that an initial outlay must be financed by either agent B or an external investor C, say a bank. We show that an option contract in combination with a loan arrangement
	facilitates first best investments and any distribution of surplus if renegotiation is infeasible. Moreover, the optimal strike price of the option is shown to differ across financing modes. If
	renegotiation is admitted, the first best can still be attained unless A's bargaining position is too strong. Otherwise, B financing or C financing may become strictly preferable, and a 
	combination of multiple lenders may be optimal. 
Note: 
Length: 28
Creation-Date: 2001-07	
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse27_2001.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse27_2001