A Study of Inaction in Investment Games via the Early Exercise Premium Representation

Doriana Ruffino and Jonathan Treussard ()
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Jonathan Treussard: Boston University, Department of Economics

No WP2006-040, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: This paper examines strategic investment in the context of a duopolistic continuous- time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under ?xed costs of investment and time-to-build, the ?rm pays a fraction of the implicit strike price to its competitor in the form of transferred foregone consumer demand. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. We ?nd that positive capital depreciation, technology improvement, and harm e¤ects to the low-technology producer are not su¢ cient to generate equilibria characterized by action.

Pages: 32 pages
Date: 2006-07
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mac
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Citations: View citations in EconPapers (3)

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