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Real option duopolies with quasi-hyperbolic discounting

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  • Luo, Pengfei
  • Tian, Yuan
  • Yang, Zhaojun

Abstract

This paper utilizes a real options and game-theoretic approach to consider the strategic real investment in a duopoly market under uncertainty with time-inconsistent preferences resulting from quasi-hyperbolic discounting. We show that the time-consistent agent becomes the leader when s/he interacts with a time-inconsistent rival. If the rival’s time inconsistency is very significant, the leader will optimally behave as if competition did not exist. If the two rivals have about the same time preferences, the leader will accelerate investment and her/his investment threshold will accord with the rival’s preemptive one, which is higher than that determined in the classical time-consistent model. The inefficiency of investment from preemptive competition is mitigated and even eliminated if the heterogeneity among agents is sufficiently high. Our model provides a behavioral explanation for the empirical fact that preemption occurs in some markets but is not present in others.

Suggested Citation

  • Luo, Pengfei & Tian, Yuan & Yang, Zhaojun, 2020. "Real option duopolies with quasi-hyperbolic discounting," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:dyncon:v:111:y:2020:i:c:s0165188919302246
    DOI: 10.1016/j.jedc.2019.103829
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    References listed on IDEAS

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    Cited by:

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    2. Li, Yanzhao & Guo, Ju-e & Li, Yongwu & Zhang, Jinggong, 2024. "Intensified distortion: Investment decisions with endogenous contracts and time inconsistency," Finance Research Letters, Elsevier, vol. 65(C).
    3. Michi Nishihara, 2021. "Preemptive competition between two firms with different discount rates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 675-687, April.
    4. Tan, Yingxian & Luo, Pengfei, 2021. "The impact of debt restructuring on dynamic investment and financing policies," Economic Modelling, Elsevier, vol. 102(C).
    5. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.

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    More about this item

    Keywords

    Option game; Duopoly competition; Time-inconsistent preferences; Preemptive investment;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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