Strategic real options under asymmetric information
This paper studies the effect of private information on the capital allocation decisions of firms who operate under imperfect competition. I analyze two interactive firms, one with private information and the other without, who must decide when to undertake an irreversible and uncertain investment decision. Traditional non-strategic models of irreversible investment under uncertainty involve a single decision maker and result in an optimal period of delay before the investment is undertaken. In a strategic setting, firms must balance their desire to delay against competitive advantages from early investment. I find that an equilibrium may not exist within the standard continuous framework when the private information is over revenues. Moreover, when an equilibrium does exist the competitive pressures from the uninformed firm are weak. This is in contrast to existing models with asymmetric information over costs, where an equilibrium always exists and the competitive pressures remain strong (Hsu and Lambrecht, 2007). This work shows that the investment timing decision, and thus the value of the private information, is highly sensitive to the nature of incomplete information.
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- Jacco Thijssen & Kuno Huisman & Peter Kort, 2006.
"The effects of information on strategic investment and welfare,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 399-424, 06.
- J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers 200310, Trinity College Dublin, Department of Economics.
- Pawlina, G. & Kort, P.M., 2005.
"Investment under uncertainty and policy change,"
Other publications TiSEM
dc869876-eaea-427c-ad5f-5, Tilburg University, School of Economics and Management.
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- Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
- Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
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- 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 1653-1679, December.
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