On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach

Elmar Lukas () and Andreas Welling ()
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Elmar Lukas: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg
Andreas Welling: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg

No 120030, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: This paper examines the effect of uncertainty on investment timing in a game theoretical real option model. We extend the settings of Gryglewicz et al. (2008), Wong (2007), and Sarkar (2000) by a more general assumption, i.e. the investment is also influenced by the actions of a second player. The results show that a U-shaped investment-uncertainty relationship generally sustains. However, timing of an investment occurs inefficiently late. Moreover, we show that the influence of uncertainty on the associated first-mover advantage becomes ambiguous, too.

Keywords: real option; investment; uncertainty; managerial flexibility; game theory (search for similar items in EconPapers)
JEL-codes: C70 D81 G13 G30 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2012-11
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