IDEAS home Printed from
   My bibliography  Save this paper

Strategic Urban Development under Uncertainty


  • Flavia Cortelezzi
  • Pierpaolo Giannoccolo


Aim of this paper is to analyse the equilibrium strategies of two developers in the real estate market, when demands are asymmetric. In particular, we are able to consider three key features of the real estate market. First, the cost of redevelop a building is, at least partially, irreversible. Second, the rent levels for different building vary stochastically over time. Third, demand functions for space are interrelated and may produce positive or negative externalities. Using the method of option pricing theory, we address this issue at three levels. First, we model the investment decision of a firm as a pre-assigned leader as a dynamic stochastic game. Then, we solve for the non-cooperative (decentralised) case, and for the perfectly cooperative case, in which redevelopment of an area is coordinated between firms. Finally, we analyse the efficiency/inefficiency of the equilibria of the game. We find that if one firm has a significantly large comparative advantage, the pre-emptive threat from the rival will be negligible. In this case, short burst and overbuilding phenomena as predicted by Grenadier (1996) will occur only as a limiting case.

Suggested Citation

  • Flavia Cortelezzi & Pierpaolo Giannoccolo, 2006. "Strategic Urban Development under Uncertainty," Working Papers 20060601, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica, revised Jun 2006.
  • Handle: RePEc:mis:wpaper:20060601

    Download full text from publisher

    File URL:
    File Function: First version, June 2006
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Huisman, Kuno J. M. & Kort, Peter M., 2004. "Strategic technology adoption taking into account future technological improvements: A real options approach," European Journal of Operational Research, Elsevier, vol. 159(3), pages 705-728, December.
    2. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
    3. Weeds, H., 1999. "Sleeping Patents and Computsory Licensing: An Options Analysis," The Warwick Economics Research Paper Series (TWERPS) 577, University of Warwick, Department of Economics.
    4. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
    5. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Discussion Paper 1999-92, Tilburg University, Center for Economic Research.
    6. Dennis R. Capozza & Yuming Li, 2001. "Residential Investment and Interest Rates: An Empirical Test of Land Development as a Real Option," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 503-519.
    7. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    8. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
    9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, July.
    10. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Weiß, Dominik, 2009. "Keeping the Bubble Alive! The Effects of Urban Renewal and Demolition Subsidies in the East German Housing Market," IWH Discussion Papers 11/2009, Halle Institute for Economic Research (IWH).

    More about this item


    Duopoly Game; Real Options; Preemptive Strategies; Asymmetric Demands;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mis:wpaper:20060601. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matteo Pelagatti). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.