On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach
AbstractThis paper examines the effect of uncertainty on investment timing in a game theoretical real option model. We extend the settings of Gryglewicz et al. (2008), Wong (2007), and Sarkar (2000) by a more general assumption, i.e. the investment is also influenced by the actions of a second player. The results show that a U-shaped investment-uncertainty relationship generally sustains. However, timing of an investment occurs inefficiently late. Moreover, we show that the influence of uncertainty on the associated first-mover advantage becomes ambiguous, too.
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Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120030.
Length: 19 pages
Date of creation: Nov 2012
Date of revision:
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More information through EDIRC
real option; investment; uncertainty; managerial flexibility; game theory;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
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