Preemptive Investment Game with Alternative Projects
This paper derives a preemptive equilibrium in strategic investment in alternative projects. The problem is formulated in a real options model with a multidimensional state variable that represents project-specific uncertainty. The proposed method enables us to evaluate the value of potential alternatives. The results not only extend previous studies with a one-dimensional state variable but also reveal new findings. Preemptive investment takes place earlier and the project value becomes lower if the numbers of both firms and projects increase by the same amount. Interestingly, a strong correlation among profits from projects, unlike in a monopoly, plays a positive role in moderating preemptive competition.
|Date of creation:||Jun 2009|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.osaka-u.ac.jp/|
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- Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
- Grenadier, Steven R. & Wang, Neng, 2005.
"Investment timing, agency, and information,"
Journal of Financial Economics,
Elsevier, vol. 75(3), pages 493-533, March.
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