On the investment–uncertainty relationship: A game theoretic real option approach

Elmar Lukas and Andreas Welling

Finance Research Letters, 2014, vol. 11, issue 1, 25-35

Abstract: This paper examines the effect of uncertainty on investment timing in a game theoretic real option model. We extend the settings of the related recent literature on investment timing under uncertainty 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 even for infinite-lived investment projects and proper defined cash flows. 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)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:1:p:25-35

DOI: 10.1016/j.frl.2013.07.006

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