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Learning and payoff externalities in an investment game

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  • Margaria, Chiara

Abstract

This paper examines the interplay of informational and payoff externalities in a two-player irreversible investment game. Each player learns about the quality of his project by observing a private signal and the action of his opponent. I characterize the unique symmetric equilibrium in a timing game that features a second-mover advantage, allowing for arbitrary correlation in project qualities. Despite private learning, the game reduces to a stochastic war of attrition. In contrast to the case of purely informational externalities, all investments happen at the same real time instant—irrespective of the sign of the correlation—and beliefs never get trapped in a no-learning region, provided that the second-mover advantage is sufficiently high.

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  • Margaria, Chiara, 2020. "Learning and payoff externalities in an investment game," Games and Economic Behavior, Elsevier, vol. 119(C), pages 234-250.
    • Handle: RePEc:eee:gamebe:v:119:y:2020:i:c:p:234-250
    DOI: 10.1016/j.geb.2019.11.006
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    Cited by:

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    2. Chen, Chia-Hui & Ishida, Junichiro & Mukherjee, Arijit, 2023. "Pioneer, early follower or late entrant: Entry dynamics with learning and market competition," European Economic Review, Elsevier, vol. 152(C).
    3. Wagner, Peter A. & Klein, Nicolas, 2022. "Strategic investment and learning with private information," Journal of Economic Theory, Elsevier, vol. 204(C).
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    6. Boyarchenko, Svetlana, 2021. "Inefficiency of sponsored research," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    7. Bloch, Francis & Fabrizi, Simona & Lippert, Steffen, 2022. "Hiding and herding in market entry," Journal of Economic Theory, Elsevier, vol. 206(C).

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    More about this item

    Keywords

    Irreversible investment; Payoff externalities; War of attrition; Real option;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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