The Auctions of Real Options, Financial Innovations, and Economic Growth

Corporations and governments frequently sell assets with embedded real options using cash and security bids in both formal and informal settings. My research aims to point out the inefficiencies in the endogenous timing of auctions and the post-auction investments under many current practices, and illuminate the impacts of innovative security design, strategic timing, and seller’s commitment on the revenue and social welfare in these transactions. One particular application of the study is in the leasing and sales of natural resources, such as oil and natural gas, and has important implications for underdeveloped countries that have been making inefficient use of their natural endowments. For example, understanding the trade-offs and innovating on selling mechanisms can generate more revenue for the local governments to build better infrastructure for economic development, create stable industries and employment opportunities, more effectively utilize natural resources, and prevent exploitation by foreign contractors. To achieve my research objectives, I first build a theoretical model with general applicability, then conduct empirical analysis focusing on the oil and gas industry. The latter consists of surveys, interviews, and rigorous econometric tests. Funding is needed to support data acquisition, and costs incurred in surveys and interviews.