Option Games: The Interface Between Optimal Stopping and Game Theory

Abstract

Managers can stake a claim by committing to capital investments today that can influence their rivals' behavior or take a "wait-and-see" or step-by-step approach to avoid possible adverse market consequences tomorrow. At the core of this corporate dilemma lies the classic trade-off between commitment and flexibility. This trade-off calls for a careful balancing of the merits of flexibility against those of commitment. This balancing is captured by option games.