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We characterize optimal investment and compensation strategies in a model of an investment opportunity with managerial incentive problems, caused by asymmetric information over investment costs and the manager's desire to consume slack, and flexibility over the timing of its acceptance. The flexibility over timing consists of the opportunity to invest immediately, delay investment for one period, or not invest at all. The timing option provides an opportunity to invest when circumstances are most favorable. However, the timing option also gives the manager an incentive to influence the timing of the investment to circumstances in which he gets more slack. Under the assumption that investment costs are distributed independently over time, the optimal investment policy consists of a sequence of target costs, below which investment takes place and above which it does not. The timing option reduce optimal cost targets, relative to the case when no timing option is present. The first cost target is lowered because the compensation function calls for the payment of an amount equal to the manager's option to generate future slack, should investment take place. This increases the cost of investing at the first opportunity, thus reducing its attractiveness. In order to ease the incentive problem at the initial investment opportunity, the second target cost is also lowered, even though no further timing options remain. Making the additional assumption that costs are uniformly distributed, we generate additional insights. We find circumstances in which the profitability of investing initially exceeds the profitability of investing at the second opportunity, a result that is impossible in the first-best context. Second, we identify circumstances under which the initial target cost is increased by incentive effects. Third, we identify the conditions under which the option to wait is effectively shut down when incentive problems exist. The implications of relaxing several key assumptions, such as investment cost independence, the owner's commitment to the manager and not to renegotiate, are explored.


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