Preemption in a real option game with a first mover advantage and player-specific uncertainty

Jacco Thijssen

Journal of Economic Theory, 2010, vol. 145, issue 6, 2448-2462

Abstract: In this paper a two-player real option game with a first-mover advantage is analyzed, where payoffs are driven by a player-specific stochastic state variable. It is shown that there exists an equilibrium which has qualitatively different properties from those in standard real option games driven by common stochastic shocks. The properties of the equilibrium are four-fold: (i) preemption does not necessarily occur, (ii) if preemption takes place, the rent-equalization property holds, (iii) for almost all sample paths it is clear ex-ante which player invests first, and (iv) it is possible that both players invest simultaneously, even if that is not optimal. It is argued from simulations that real option games with a common one-dimensional shock do not provide a good approximation for games with player-specific uncertainty, even if these are highly correlated.

Keywords: Timing; games; Preemption; Rent; equalization (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:145:y:2010:i:6:p:2448-2462

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