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Bandwagon Investment Equilibrium of Investment Timing Games

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  • Kihyung Kim
  • Abhijit Deshmukh

Abstract

Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. We investigate the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. We show that investors are on the investment bandwagon when (1) they expand their current capacities and (2) the second mover’s additional profit rate exceeds a threshold value. Otherwise, investors invest sequentially. This result explains the frequently observed investment herd effect.

Suggested Citation

  • Kihyung Kim & Abhijit Deshmukh, 2021. "Bandwagon Investment Equilibrium of Investment Timing Games," The Engineering Economist, Taylor & Francis Journals, vol. 66(4), pages 265-278, December.
    • Handle: RePEc:taf:uteexx:v:66:y:2021:i:4:p:265-278
    DOI: 10.1080/0013791X.2020.1829222
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