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Strategic investment evaluation

Author

Listed:
  • Kirpalani, Rishabh

    (Department of Economics, University of Wisconsin-Madison)

  • Madsen, Erik

    (Department of Economics, New York University)

Abstract

We study the interaction of incentives to free-ride on information acquisition and strategically delay irreversible investment in environments in which multiple firms evaluate an investment opportunity. In our model, two firms decide how quickly to privately obtain information about the profitability of a project, and when (if ever) to publicly invest in it. Multiple equilibria exist, differing with respect to how much information firms acquire as well as how quickly they invest. The equilibrium which maximizes aggregate payoffs features asymmetric play with distinct leader and follower roles when firms are patient, but features symmetric play when firms are impatient and information acquisition costs are sufficiently high.

Suggested Citation

  • Kirpalani, Rishabh & Madsen, Erik, 2023. "Strategic investment evaluation," Theoretical Economics, Econometric Society, vol. 18(3), July.
    • Handle: RePEc:the:publsh:4806
    as

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    References listed on IDEAS

    as
    1. , & ,, 2010. "Strategic experimentation with Poisson bandits," Theoretical Economics, Econometric Society, vol. 5(2), May.
    2. Aghamolla, Cyrus & Hashimoto, Tadashi, 2020. "Information arrival, delay, and clustering in financial markets with dynamic freeriding," Journal of Financial Economics, Elsevier, vol. 138(1), pages 27-52.
    3. Murto, Pauli & Välimäki, Juuso, 2013. "Delay and information aggregation in stopping games with private information," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2404-2435.
    4. Hendricks, Kenneth & Porter, Robert H, 1996. "The Timing and Incidence of Exploratory Drilling on Offshore Wildcat Tracts," American Economic Review, American Economic Association, vol. 86(3), pages 388-407, June.
    5. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
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    Cited by:

    1. Ayse Gül Mermer & Sander Onderstal & Joep Sonnemans, "undated". "Can Communication Mitigate Strategic Delays in Investment Timing?," Tinbergen Institute Discussion Papers 23-033/I, Tinbergen Institute.

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    More about this item

    Keywords

    Social learning; investment timing; strategic information acquisition;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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