Project Capital Allocation Combination Equilibrium Decision Model Based on Behavioral Option Game

Abstract EN

Aiming at option value of the project and fairness preference psychological utility features, this paper modified objective function between players by option game equilibrium and utility function of project managers by inequity aversion.

Therefore, under the symmetric and asymmetric information conditions, a project capital allocation combination equilibrium decision model has been built.

It draws a conclusion that the option value of projects has changed the utility function of shareholders and managers in capital allocation, whereas fairness preferences of the project managers have changed the way of allocation through psychological utility.

These two effects have influenced the trigger point of capital allocation decision-making.

One is the decrease of trigger point owing to capital allocation decision-making of a CEO affected by the option value; the other is the reaction due to the crowding-out and crowding-in effect of the project manager’s fairness preference, which restrains the severity of underinvestment.

Therefore, a good incentive plan should be a balance among insurance, incentive, and fairness, not only a balance between insurance and incentive.