Bandwagon Investment Equilibrium of Investment Timing Games

Kihyung Kim and Abhijit Deshmukh

The Engineering Economist, 2021, vol. 66, issue 4, 265-278

Abstract: Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. We investigate the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. We show that investors are on the investment bandwagon when (1) they expand their current capacities and (2) the second mover’s additional profit rate exceeds a threshold value. Otherwise, investors invest sequentially. This result explains the frequently observed investment herd effect.

Date: 2021
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DOI: 10.1080/0013791X.2020.1829222

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