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Irreversible Investment and Learning Externalities

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  • Décamps, Jean-Paul
  • Mariotti, Thomas

Abstract

In this paper, we develop a continuous time duopoly model of irreversible investment under uncertainty, where each player may learn about the profitability of an investment by observing the experience of his rival, as well as some costless background information. We show that the resulting war of attrition game has a unique, symmetric perfect Bayesian equilibrium. We determine the impact of changes in the cost distribution and the stochastic environment on the timing of investment. Last, we study how the equilibrium is affected by the introduction of a first-mover advantage.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 97.

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Date of creation: 2000
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Publication status: Published in Journal of Economic Theory, vol.�118, n°1, septembre 2004, p.�80-102.
Handle: RePEc:ide:wpaper:677

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References

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  1. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  2. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July.
  3. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2000. "Preemption and Rent Dissipation with Multiple Investments," CIRANO Working Papers 2000s-06, CIRANO.
  4. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  5. Rady, Sven & Keller, Godfrey, 2010. "Strategic experimentation with Poisson bandits," Theoretical Economics, Econometric Society, vol. 5(2), May.
  6. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 439-54, July.
  7. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  8. Dutta, P.K. & Rustichini, A., 1991. "A Theory of stopping Time Games with Applications to Product Innovations and Asset Sales," RCER Working Papers 263, University of Rochester - Center for Economic Research (RCER).
  9. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  10. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
  11. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
  12. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  13. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  14. Bart Lambrecht & William Perraudin, 1996. "Real Options and Preemption," Archive Working Papers 026, Birkbeck, Department of Economics, Mathematics & Statistics.
  15. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
  16. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
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Cited by:
  1. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," Cahiers de recherche du Département des sciences économiques, UQAM 20-10, Université du Québec à Montréal, Département des sciences économiques.
  2. Grzegorz Pawlina & Peter M. Kort, 2006. "Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 1-35, 03.
  3. Thijssen, J.J.J., 2003. "Investment Under Uncertainty, Market Evolution and Coalition Spillovers in a Game Theoretic Perspective," Open Access publications from Tilburg University urn:nbn:nl:ui:12-111840, Tilburg University.
  4. Pawlina, G. & Kort, P.M., 2001. "Strategic Capital Budgeting: Asset Replacement Under Uncertainty," Discussion Paper 2001-4, Tilburg University, Center for Economic Research.

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