Strategic Urban Development under Uncertainty
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.
|Date of creation:||Jun 2006|
|Date of revision:||Jun 2006|
|Contact details of provider:|| Postal: |
Web page: http://www.statistica.unimib.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Huisman, K.J.M. & Kort, P.M., 2004.
"Strategic technology adoption taking into account future technological improvements : A real options approach,"
Other publications TiSEM
cfab60d6-970e-4dc7-b11c-e, Tilburg University, School of Economics and Management.
- 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.
- Huisman, K.J.M. & Kort, P.M., 2000. "Strategic Technology Adoptation Taking into Account Future Technological Improvements : A Real Options Approach," Discussion Paper 2000-52, Tilburg University, Center for Economic Research.
- 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.
- Merton, Robert C., 1975.
"Option pricing when underlying stock returns are discontinuous,"
787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
- Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- 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.
- 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.
- Weeds, H., 2000.
"Strategic Delay in a Real Optimna Model of R&D Competition,"
The Warwick Economics Research Paper Series (TWERPS)
576, University of Warwick, Department of Economics.
- Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
- 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.
- 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.
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)
If references are entirely missing, you can add them using this form.