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Real Options Conference 2023

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Resource Idling and Resource Redeployment: Theory and Empirical Test In Oil Wells

Resource redeployment and resource idling are two important resource allocation strategies that have always been considered separately from each other. This study develops a formal model that demonstrates that resource idling is an important precursor to resource redeployment. Not only does idling directly increase the use of redeployment but it also significantly enhances the effects of the inducement and cost to redeploy, which are two key determinants of redeployment. These theoretical predictions are tested with data on oil wells drilled in Texas over 25 years. The resource that can be idled and redeployed in this context is the rig owned by an oil-drilling contractor. Empirical analyses corroborate the theoretical predictions and demonstrate that the results are economically meaningful. In addition, the study demonstrates the biases that exist when redeployment is considered separately from idling.

Toby Li
Mays Business School, Texas A&M University
United States

Jeffrey Reuer
Leeds School of Business, University of Colorado Boulder
United States

Arkadiy Sakhartov
Gies College of Business, University of Illinois at Urbana-Champaign


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