Strategic investment with positive externalities

Jan-Henrik Steg and Jacco J.J. Thijssen

Games and Economic Behavior, 2023, vol. 138, issue C, 1-21

Abstract: We study strategic investment in continuous time with positive externalities of changing magnitude. Our model particularly allows for two correlated risk factors. Constructing subgame-perfect equilibria with pure and mixed strategies, we observe the novel effect that it is important for the firms to anticipate preemption. In fact, the presence of a second risk factor implies also an additional strategic risk. We quantify the associated extra waiting cost and show that it is ex ante uncertain whether investment will happen when there is a first- or a second-mover advantage. Our formal arguments involve several methodological contributions. In addition, we provide detailed specifications of our basic model to address various applications.

Keywords: Real options; Externalities; Preemption; War of attrition; Optimal stopping; Multi-dimensional (search for similar items in EconPapers)
JEL-codes: C61 C73 D43 L13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:138:y:2023:i:c:p:1-21

DOI: 10.1016/j.geb.2022.11.013

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