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Real Options and Game Theoretical Approaches to Real Estate Development Projects: Multiple Equilibria and the Implications of Different Tie-Breaking Rules

  • Tommaso Gabrieli

    ()

    (School of Real Estate & Planning, Henley Business School, University of Reading)

  • Gianluca Marcato

    ()

    (School of Real Estate & Planning, Henley Business School, University of Reading)

This paper contributes to a fast growing literature which introduces game theory in the analysis of real option investments in a competitive setting. Specifically, in this paper we focus on the issue of multiple equilibria and on the implications that different equilibrium selections may have for the pricing of real options and for subsequent strategic decisions. We present some theoretical results of the necessary conditions to have multiple equilibria and we show under which conditions different tie-breaking rules result in different economic decisions. We then present a numerical exercise using the in formation set obtained on a real estate development in South London. We find that risk aversion reduces option value and this reduction decreases marginally as negative externalities decrease.

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File URL: http://www.reading.ac.uk/rep/fulltxt/0910.pdf
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Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2010-09.

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Length: 33 pages
Date of creation:
Date of revision:
Handle: RePEc:rdg:repxwp:rep-wp2010-09
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