Michi Nishihara () (Graduate School of Economics, Osaka University)
Abstract
This paper derives a preemptive equilibrium in strategic investment in alternative projects. The problem is formulated in a real options model with a multidimensional state variable that represents project-specific uncertainty. The proposed method enables us to evaluate the value of potential alternatives. The results not only extend previous studies with a one-dimensional state variable but also reveal new findings. Preemptive investment takes place earlier and the project value becomes lower if the numbers of both firms and projects increase by the same amount. Interestingly, a strong correlation among profits from projects, unlike in a monopoly, plays a positive role in moderating preemptive competition.
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Publisher Info
Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number
09-16.
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