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Preemptive Investment Game with Alternative Projects

Author

Listed:
  • Michi Nishihara

    (Graduate School of Economics, Osaka University)

Abstract

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.

Suggested Citation

  • Michi Nishihara, 2009. "Preemptive Investment Game with Alternative Projects," Discussion Papers in Economics and Business 09-16, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0916
    as

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0916.pdf
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    References listed on IDEAS

    as
    1. Grenadier, Steven R. & Wang, Neng, 2005. "Investment timing, agency, and information," Journal of Financial Economics, Elsevier, vol. 75(3), pages 493-533, March.
    2. 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 1653-1679, December.
    3. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    strategic real options; preemption; alternative projects; stopping game.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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