Irreversible Investment with Strategic Interactions

Helen Weeds and Robin Mason

No 3013, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest, and externalities to investing when others also do so. Pre-emption decreases and may even eliminate the option values created by irreversibility and uncertainty. Externalities introduce inefficiencies in investment decisions. Pre-emption and externalities combined can actually hasten, rather than delay, investment, contrary to the usual outcome. These facts demonstrate the importance of extending ?real options? analysis to include strategic interactions.

Keywords: Real options; Network effects; Pre-emption (search for similar items in EconPapers)
JEL-codes: C73 D81 L13 O31 (search for similar items in EconPapers)
Date: 2001-10
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Citations: View citations in EconPapers (13)

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