Theoretical Economics, Volume 13, Number 1 (January 2018)

Theoretical Economics 13 (2018), 115–144

Dynamic project selection

Arina Nikandrova, Romans Pancs


We study a normative model of an internal capital market that a company uses to choose between its two divisions’ projects. Each project's value is initially unknown to all, but can be dynamically learned by the corresponding division. Learning can be suspended or resumed at any time and is costly. We characterize an internal capital market that maximizes the company’s expected cash flow.

Keywords: Internal capital market, irreversible project selection

JEL classification: D82, D83, G320, G310

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