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Preemptive Investment Game with Alternative Projects

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  • Michi Nishihara

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    (Graduate School of Economics, Osaka University)

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    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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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0916.pdf
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    Bibliographic 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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    Length: 21 pages
    Date of creation: Jun 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0916

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: strategic real options; preemption; alternative projects; stopping game.;

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    1. Grenadier, Steven R. & Wang, Neng, 2005. "Investment timing, agency, and information," Journal of Financial Economics, Elsevier, vol. 75(3), pages 493-533, March.
    2. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
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