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Bandwagon investment equilibrium of a preemption game

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  • Kim, KiHyung
  • Deshmukh, Abhijit

Abstract

In stochastic and competitive environments, investors face an investment dilemma because the environments provide conflicting incentives. 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. The authors investigated the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. They showed that investors are on the investment bandwagon when the second mover's additional profit rate exceeds a threshold value. Otherwise, investors sequentially invest. It explains the frequently observed investment herd effect. Moreover, it shows that the investment bandwagon effect does not exist for entering firms.

Suggested Citation

  • Kim, KiHyung & Deshmukh, Abhijit, 2018. "Bandwagon investment equilibrium of a preemption game," Economics Discussion Papers 2018-39, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201839
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    Keywords

    option exercise games; preemption games; bandwagon investment; closed-loop equilibrium;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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