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Irreversible, Unobservable, Costly Investment in the Presence of Rivals

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  • Carolyn Pitchik

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://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-PITCHIK-96-01.ps
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Bibliographic 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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Keywords: Chain-store paradox; Discrimination; Entry deterrence; Investment; Noise; Reputation; Signalling; Takeovers;

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  1. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  2. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
  3. 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.
  4. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  5. Richard Startz & Lundberg, . "Private Discrimination and Social Intervention in Competitive Labor Markets," Rodney L. White Center for Financial Research Working Papers 19-81, Wharton School Rodney L. White Center for Financial Research.
  6. Pitchik Carolyn, 1993. "Commitment, Reputation, and Entry Deterrence," Games and Economic Behavior, Elsevier, vol. 5(2), pages 268-287, April.
  7. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers 674, Cowles Foundation for Research in Economics, Yale University.
  8. 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.
  9. 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.
  10. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
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