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Investment under uncertainty, competition and regulation

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  • Adrien Nguyen Huu

    (FiME Lab, IMPA)

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    Abstract

    We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of [M. Grasselli, V. Lecl\`ere and M. Ludkovsky, Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013], and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.

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    File URL: http://arxiv.org/pdf/1309.1844
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1309.1844.

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    Date of creation: Sep 2013
    Date of revision: Feb 2014
    Handle: RePEc:arx:papers:1309.1844

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    Web page: http://arxiv.org/

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    1. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
    2. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
    3. Becherer, Dirk, 2003. "Rational hedging and valuation of integrated risks under constant absolute risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 1-28, August.
    4. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 383-401, July.
    5. Paxson, Dean & Pinto, Helena, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, Elsevier, Elsevier, vol. 14(3-4), pages 209-224.
    6. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1653-79, December.
    7. Steven R. Grenadier, 2000. "Option Exercise Games: The Intersection Of Real Options And Game Theory," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 13(2), pages 99-107.
    8. Thijssen, Jacco J.J., 2010. "Preemption in a real option game with a first mover advantage and player-specific uncertainty," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(6), pages 2448-2462, November.
    9. Chevalier-Roignant, BenoƮt & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, Elsevier, vol. 215(3), pages 639-650, December.
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