Irreversible, Unobservable, Costly Investment in the Presence of Rivals
AbstractI 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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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number pitchik-96-01.
Length: 23 pages
Date of creation: 05 Jul 1996
Date of revision:
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Chain-store paradox; Discrimination; Entry deterrence; Investment; Noise; Reputation; Signalling; Takeovers;
Other versions of this item:
- Carolyn Pitchik, 1998. "Irreversible, Unobservable, Costly Investment in the Presence of Rivals," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 77-91, February.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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