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Irreversible Investment and Learning Expternalities

  • Decamps, J.-P.
  • Mariotti, T.

In this paper, we develop a continuous time duopoly model of irreversible investment under uncertainty, where each player may learn about the profitability of an investment by observing the experience of his rival, as well as some costless background information. We show that the resulting war of attrition game has a unique, symmetric perfect Bayesian equilibrium. We determine the impact of changes in the cost distribution and the stochastic environment on the timing of investment. Last, we study how the equilibrium is affected by the introduction of a first-mover advantage.

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Paper provided by Toulouse - GREMAQ in its series Papers with number 00-534.

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Length: 56 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:gremaq:00-534
Contact details of provider: Postal: GREMAQ, Universite de Toulouse I Place Anatole France 31042 - Toulouse CEDEX France.
Fax: 05 61 22 55 63
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