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A Study of Inaction in Investment Games via the Early Exercise Premium Representation

  • Doriana Ruffino


    (Boston University, Department of Economics)

  • Jonathan Treussard


    (Boston University, Department of Economics)

This paper examines strategic investment in the context of a duopolistic continuous- time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under ?xed costs of investment and time-to-build, the ?rm pays a fraction of the implicit strike price to its competitor in the form of transferred foregone consumer demand. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. We ?nd that positive capital depreciation, technology improvement, and harm e¤ects to the low-technology producer are not su¢ cient to generate equilibria characterized by action.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-040.

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Length: 32 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-040
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  16. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
  17. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
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