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Irreversible, Unobservable, Costly Investment in the Presence of Rivals

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Author Info
Carolyn Pitchik

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Abstract

I identify circumstances in which an agent wants to make a costly but unobservable irreversible investment that affects the subsequent noisy economic environment. In equilibrium, rivals may eventually infer that the agent is strong even though it initially appeared weak, so long as enough "strength" is seen subsequently. Comparative statics reveal that the higher is the rivals' opportunity cost, the more likely is the agent not to make the costly investment in equilibrium. In addition, as the amount of noise decreases, the probability that the agent invests increases and the probability that a challenge occurs decreases.

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File URL: http://repec.economics.utoronto.ca/files/UT-ECIPA-PITCHIK-96-01.ps
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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number pitchik-96-01.

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Length: 23 pages
Date of creation: 05 Jul 1996
Date of revision:
Handle: RePEc:tor:tecipa:pitchik-96-01

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Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283
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Related research
Keywords: Chain-store paradox; Discrimination; Entry deterrence; Investment; Noise; Reputation; Signalling; Takeovers;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  2. Pitchik Carolyn, 1993. "Commitment, Reputation, and Entry Deterrence," Games and Economic Behavior, Elsevier, vol. 5(2), pages 268-287, April. [Downloadable!] (restricted)
  3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
    Other versions:
  4. Hilke, John C. & Nelson, Philip B., 1987. "Caveat innovator : Strategic and structural characteristics of new product introductions," Journal of Economic Behavior & Organization, Elsevier, vol. 8(2), pages 213-229, June. [Downloadable!] (restricted)
  5. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers 674, Cowles Foundation, Yale University. [Downloadable!]
  6. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August. [Downloadable!] (restricted)
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  7. Carmichael, H Lorne, 1989. "Self-Enforcing Contracts, Shirking, and Life Cycle Incentives," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 65-83, Fall. [Downloadable!] (restricted)
  8. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring. [Downloadable!] (restricted)
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  9. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter. [Downloadable!] (restricted)
  10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  11. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August. [Downloadable!] (restricted)
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  12. Lundberg, Shelly J & Startz, Richard, 1983. "Private Discrimination and Social Intervention in Competitive Labor Markets," American Economic Review, American Economic Association, vol. 73(3), pages 340-47, June. [Downloadable!] (restricted)
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