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A Study of Inaction in Investment Games via the Early Exercise Premium Representation

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Author Info
Doriana Ruffino () (Boston University, Department of Economics)
Jonathan Treussard () (Boston University, Department of Economics)
Abstract

This paper examines strategic investment in the context of a duopolistic continuous- time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under ?xed costs of investment and time-to-build, the ?rm pays a fraction of the implicit strike price to its competitor in the form of transferred foregone consumer demand. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. We ?nd that positive capital depreciation, technology improvement, and harm e¤ects to the low-technology producer are not su¢ cient to generate equilibria characterized by action.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-040.

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Length: 32 pages
Date of creation: Jul 2006
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Handle: RePEc:bos:wpaper:wp2006-040

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  1. Doriana Ruffino & Jonathan Treussard, 2006. "Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach," Boston University - Department of Economics - Working Papers Series WP2006-044, Boston University - Department of Economics. [Downloadable!]
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