Irreversible, Unobservable, Costly Investment in the Presence of Rivals
AbstractThe author identifies circumstances in which an agent makes a costly, unobservable, irreversible investment that affects the subsequent noisy economic environment. Rivals infer that the agent is strong, even though it initially appeared weak, if enough 'strength' is seen subsequently. Comparative statics reveal that the higher is the rivals' opportunity cost, the more likely is the agent not to make the costly investment. As the amount of noise decreases, the probability that a challenge occurs decreases. In addition, as the amount of noise decreases, the probability that the agent invests increases (decreases) if the rivals' opportunity cost is relatively high (low).
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 31 (1998)
Issue (Month): 1 (February)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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Other versions of this item:
- Carolyn Pitchik, 1996. "Irreversible, Unobservable, Costly Investment in the Presence of Rivals," Working Papers pitchik-96-01, University of Toronto, Department of Economics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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